Competing One-Way Essential Complements: The Forgotten Side of Net Neutrality

Abstract

We analyze the incentives of internet service providers (ISPs) to break net neutrality by excluding internet applications competing with their own products, a typical example being the exclusion of VoIP applications by telecom companies offering internet and voice services. Exclusion is not a concern when the ISP is a monopoly because it can extract the additional surplus created by the application through price rebalancing. When ISPs compete, it could lead to a fragmented internet where only one firm offers the application. We show that, both in monopoly and duopoly, prohibiting the exclusion of the app and surcharges for its use – a strong form of net neutrality – is not welfare improving.

Keywords: Net Neutrality, Foreclosure, One-Way Essential Complements

JEL Classification: L12, L13, L51, L96