The Strategic Use of Download Limits by a Monopoly Platform
43 Pages Posted: 6 Dec 2013 Last revised: 30 Oct 2014
Date Written: October 15, 2014
We consider a heretofore unexplored explanation for why platforms, such as Internet service providers and mobile-phone networks, offer plans with download limits: through one of two mechanisms, doing so causes the providers of the content consumer purchase to either reduce their prices or increase their quality. This, in turn, generates greater surplus for consumers. A platform captures this increased surplus by charging consumers higher access fees. Even accounting for congestion externalities, we show that a platform will tend to restrict downloads more than would be welfare-maximizing; indeed, in some instances, by so much that a complete prohibition on such behavior is welfare superior to the practices the platform would pursue. Somewhat paradoxically, we show that a platform will install more bandwidth when allowed to restrict downloads than when prevented from doing so. Other related phenomena are explored.
Keywords: two-sided markets, Internet, download limits (caps), congested platforms, network neutrality, price discrimination
JEL Classification: L1, D4, L12, L13, C63, D42, D43
Suggested Citation: Suggested Citation