The Strategic Use of Download Limits by a Monopoly Platform

42 Pages Posted: 7 Mar 2015

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: October 15, 2014

Abstract

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

Economides, Nicholas and Hermalin, Benjamin E., The Strategic Use of Download Limits by a Monopoly Platform (October 15, 2014). Available at SSRN: https://ssrn.com/abstract=2574401 or http://dx.doi.org/10.2139/ssrn.2574401

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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