Net Neutrality or Minimum Quality Standards: Network Effects vs. Market Power Justifications

Abstract

Net neutrality - all bits should be treated identically by broadband Internet service providers regardless of source - is hotly debated. Proponents find adequate competition among broadband providers to prevent harm from content-based discrimination. Opponents find such regulation premature or unnecessary, noting that uniform treatment precludes higher quality services and effective congestion management. Both sides neglect network externalities - the value of broadband to each content provider depends on the expected quality of links to others’ content. Competition could exacerbate this, as each provider fails to internalize the network externality. This suggests an alternative approach - a minimum quality of service standard. This addresses underlying concerns at far lower cost than net neutrality, while fostering innovation by allowing providers to offer higher quality service and manage congestion, with the ancillary benefit of protecting potential speech rights of content providers. Ex post antitrust remedies will not be available if judicial limits on FCC authority remain.

Keywords: Net Neutrality, Telecommunications Policy, Network Effects, Regulation

JEL Classification: L96, L51, K20