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Subsidizing Creativity Through Network Design: Zero Pricing and Net Neutrality

Journal of Economic Perspectives, Vol. 23, No. 3, pp. 61-76, Summer 2009

16 Pages Posted: 15 Oct 2009  

Robin S. Lee

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Tim Wu

Columbia University - Law School

Date Written: July 21, 2009

Abstract

Today, through historical practice, there exists a de facto ban on termination fees - also referred to as a “zero-price” rule (Hemphill, 2008) - which forbids an Internet service provider from charging an additional fee to a content provider who wishes to reach that ISP’s customers. The question is whether this zero-pricing structure should be preserved, or whether carriers should be allowed to charge termination fees and engage in other practices that have the effect of requiring payment to reach users. This paper begins with a defense of the de facto zero-price rule currently in existence. We point out that the Internet, as an intermediary between users and content providers, exhibits pricing dynamics similar to other intermediaries in “two-sided markets.” In particular, we posit that the Internet’s absence of payments from content creators to users’ ISPs facilitates the entry of content creators. In that respect, the rule provides an alternative implementation of the policy goals provided by the intellectual property system and achieves functions similar to copyright and patent law. The rule also helps avoid the problems of Internet fragmentation, in which content providers who do not reach agreements with ISPs cannot access all customers, and consumers on a single ISP are foreclosed from proccessing their content.

Keywords: net neutrality, copyright

Suggested Citation

Lee, Robin S. and Wu, Tim, Subsidizing Creativity Through Network Design: Zero Pricing and Net Neutrality (July 21, 2009). Journal of Economic Perspectives, Vol. 23, No. 3, pp. 61-76, Summer 2009 . Available at SSRN: https://ssrn.com/abstract=1489166 or http://dx.doi.org/10.2139/ssrn.1489166

Robin S. Lee

Harvard University - Department of Economics ( email )

1805 Cambridge St.
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tim Wu (Contact Author)

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

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