The Strategic Use of Download Limits by a Monopoly Platform
Posted: 31 Mar 2014
Date Written: March 31, 2014
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: Suggested Citation