Network Neutrality on the Internet: A Two-Sided Market Analysis

Abstract

We discuss network neutrality regulation of the Internet in the context of a two-sided market model. Platforms sell broadband Internet access services to residential consumers and may set fees to content and application providers on the Internet. When access is monopolized, cross-group externalities (network effects) can give a rationale for network neutrality regulation (requiring zero fees to content providers): there exist parameter ranges for which network neutrality regulation increases the total surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content providers. However, for other parameter values, network neutrality regulation can decrease total surplus. Extending the model to a duopoly of residential broadband ISPs, we again find parameter values such that network neutrality regulation increases total surplus suggesting that network neutrality regulation could be warranted even when some competition is present.

Keywords: network neutrality, two-sided markets, Internet, monopoly, duopoly, regulation, discrimination, AT&T, Verizon, Comcast, Google

JEL Classification: L1, D4, L12, L13, C63, D42, D43