The Strategic Use of Download Limits by a Monopoly Platform

Posted: 31 Mar 2014

See all articles by Nicholas Economides

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

Benjamin E. Hermalin

University of California, Berkeley

Multiple version iconThere are 4 versions of this paper

Date Written: March 31, 2014

Abstract

We consider a heretofore unexplored explanation for why platforms, such as Internet service providers, might impose download limits on content consumers: doing so increases the degree to which those consumers view content providers products as substitutes. This, in turn, intensifies competition among providers, generating greater surplus for consumers. A platform, in turn, can capture this increased surplus by charging consumers higher access fees. Even accounting for congestion externalities, we show that a platform will tend to set the download limit at a lower level than would be welfare- maximizing; indeed, in some instances, so low that no download limit is welfare superior to the limit the platform would set. Somewhat paradoxically, we show that a platform will install more bandwidth when allowed to impose a download limit 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

Economides, Nicholas and Hermalin, Benjamin E., The Strategic Use of Download Limits by a Monopoly Platform (March 31, 2014). Available at SSRN: https://ssrn.com/abstract=2418545

Nicholas Economides (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Benjamin E. Hermalin

University of California, Berkeley ( email )

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Berkeley, CA 94720
United States
510-642-7575 (Phone)
510-643-1420 (Fax)

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