Net Neutrality and Investment Incentives

42 Pages Posted: 8 Sep 2008

See all articles by Jay Pil Choi

Jay Pil Choi

Michigan State University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Byung-Cheol Kim

University of Alabama

Multiple version iconThere are 2 versions of this paper

Date Written: September 2008

Abstract

This paper analyzes the effects of net neutrality regulation on investment incentives for Internet service providers (ISPs) and content providers (CPs), and their implications for social welfare. We show that the ISP's decision on the introduction of discrimination across content depends on a potential trade-off between network access fee and the revenue from the trade of the first-priority. Concerning the ISP's investment incentives, we find that capacity expansion affects the sale price of the priority right under the discriminatory regime. Because the relative merit of the first priority, and thus its value, becomes relatively small for higher capacity levels, the ISP's incentive to invest on capacity under a discriminatory network can be smaller than that under a neutral regime where such rent extraction effects do not exist. Contrary to ISPs' claims that net neutrality regulations would have a chilling effect on their incentive to invest, we cannot dismiss the possibility of the opposite.

Keywords: net neutrality, investment (innovation) incentives, queuing theory, hold-up problem, two-sided markets, vertical integration

JEL Classification: D4, L12, L4, L43, L51, L52

Suggested Citation

Choi, Jay Pil and Kim, Byung-Cheol, Net Neutrality and Investment Incentives (September 2008). CESifo Working Paper Series No. 2390. Available at SSRN: https://ssrn.com/abstract=1264934

Jay Pil Choi (Contact Author)

Michigan State University - Department of Economics ( email )

101 Marshall Hall
East Lansing, MI 48824
United States
517-353-7281 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Byung-Cheol Kim

University of Alabama ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
7708462727 (Phone)
7708462727 (Fax)

HOME PAGE: http://https://sites.google.com/site/byungcheolkim76/

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