Download this Paper Open PDF in Browser

Investment in Two Sided Markets and the Net Neutrality Debate

Columbia Business School DRO (Decision, Risk and Operations) Working Paper No. 2010-05

60 Pages Posted: 18 Jul 2010 Last revised: 21 Apr 2013

Paul Njoroge

Massachusetts Institute of Technology (MIT) - Laboratory for Information and Decision Systems

Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science

Nicolas E. Stier-Moses

Facebook; Universidad Torcuato Di Tella - School of Business

Gabriel Y. Weintraub

Stanford Graduate School of Business, Stanford University; Columbia University - Columbia Business School - Decision Risk and Operations

Date Written: Oct 2012

Abstract

This paper develops a game theoretic model based on a two-sided market framework to investigate the net neutrality debate. In particular, we consider investment incentives of Internet Service Providers (ISPs) under a neutral and non-neutral network regimes. In our model, two interconnected ISPs compete over quality and prices for heterogeneous content providers (CPs) and heterogeneous consumers. We consider two definitions of a non-neutral network: in the first, ISPs charge access fees to off-network CPs; in the second, ISPs offer "priority lanes''. In the neutral regime, connecting to a single ISP allows a CP to communicate with all consumers and all CPs obtain the same quality of service. With a combination of theoretical and numerical results we find that under both definitions ISPs' quality-investment levels are driven by the trade-off they make between softening price competition on the consumer side and increasing revenues extracted from CPs. Specifically, in the non-neutral regime, because it is easier to extract surplus through appropriate CP pricing, ISPs' investment levels are larger. Because CP quality is enhanced by the quality of ISPs, larger investment levels imply that CPs' revenues increase. Similarly, consumer surplus increases as well. The main insight resulting from our model is that social welfare is larger in the non-neutral regime. Our results highlight important mechanisms related to ISPs' investments that play a key role in market outcomes, providing useful insights that enrich the net neutrality debate.

Keywords: Two Sided Markets, Net Neutrality, Investments

Suggested Citation

Njoroge, Paul and Ozdaglar, Asuman E. and Stier-Moses, Nicolas E. and Weintraub, Gabriel Y., Investment in Two Sided Markets and the Net Neutrality Debate (Oct 2012). Columbia Business School DRO (Decision, Risk and Operations) Working Paper No. 2010-05. Available at SSRN: https://ssrn.com/abstract=1641359 or http://dx.doi.org/10.2139/ssrn.1641359

Paul Njoroge

Massachusetts Institute of Technology (MIT) - Laboratory for Information and Decision Systems ( email )

77 Massachusetts Ave
32-D608
Cambridge, MA 02139
United States

Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science ( email )

50 Memorial Drive
Cambridge, MA 02139-4307
United States
617-324-0058 (Phone)

Nicolas E. Stier-Moses (Contact Author)

Facebook

1 Facebook Way
Menlo Park, CA California 94025
United States

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina

Gabriel Y. Weintraub

Stanford Graduate School of Business, Stanford University ( email )

Stanford, CA 94305
United States

Columbia University - Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

Paper statistics

Downloads
378
Rank
64,206
Abstract Views
2,081