Net Neutrality, Exclusivity Contracts and Internet Fragmentation

Information Systems Research, Forthcoming

93 Pages Posted: 21 Dec 2014

See all articles by Frago Kourandi

Frago Kourandi

Athens University of Economics and Business - Department of Economics

Jan Kraemer

University of Passau

Tommaso M. Valletti

Imperial College Business School; University of Rome, Tor Vergata - Department of Financial and Quantitative Economics; Centre for Economic Policy Research (CEPR)

Date Written: November 9, 2014

Abstract

Net neutrality is believed to prevent the emergence of exclusive online content which yields Internet fragmentation. We examine the relationship between net neutrality regulation and Internet fragmentation in a game-theoretic model that considers the interplay be- tween termination fees, exclusivity and competition between two Internet Service Providers (ISPs) and between two Content Providers (CPs). An exclusivity arrangement between an ISP and a CP reduces the CP is exposure to some end users but it also reduces competition over ads among the CPs. Fragmentation arises in equilibrium when competition over ads among the CPs is very strong, the CPs' revenues from advertisements are very low, the content of the CPs is highly complementary, or the termination fees are high. We find that the absence of fragmentation is always beneficial for consumers, as they can enjoy all available content. Policy interventions that prevent fragmentation are thus good for consumers. However, results for total welfare are more mixed. A zero-price rule on traffic termination is neither a sufficient nor a necessary policy instrument to prevent fragmentation. In fact, regulatory interventions may be ineffective or even detrimental to welfare and are only warranted under special circumstances.

Keywords: Net neutrality; Internet fragmentation; Exclusivity

JEL Classification: L13; L51; L52; L96

Suggested Citation

Kourandi, Frago and Kraemer, Jan and Valletti, Tommaso M., Net Neutrality, Exclusivity Contracts and Internet Fragmentation (November 9, 2014). Information Systems Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2541091

Frago Kourandi

Athens University of Economics and Business - Department of Economics ( email )

76 Patission Street
GR-10434 Athens
Greece

Jan Kraemer (Contact Author)

University of Passau ( email )

Chair of Internet and Telecommunications Business
Dr.-Hans-Kapfinger-Str. 12
Passau, D-94036
Germany
+498515092580 (Phone)
+498525092582 (Fax)

HOME PAGE: http://www.kraemer.biz

Tommaso M. Valletti

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

University of Rome, Tor Vergata - Department of Financial and Quantitative Economics ( email )

Via Columbia n.2
Roma, 00133
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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