Regulating the Open Internet: Past Developments and Emerging Challenges
33 Pages Posted: 1 Apr 2017
Date Written: March 30, 2017
On June 14, 2016, in perhaps one of the most important rulings supporting Federal Communications Commission (FCC) policy, the D.C. Circuit Court of Appeals upheld the FCC’s 2015 Open Internet Order laying out network neutrality rules that govern how Internet service providers may price to edge platform users at the point of termination. Since that time, a number of political developments within the FCC and in the U.S. more broadly have led to speculation that the present rules would be, not for the first time, overturned.
In this manuscript, we provide a concise historical perspective of the FCC policies, proceedings and court decisions that led to this point and characterize emerging economic policy challenges that the current rules leave unresolved. We then frame these challenges in ongoing economic and political developments.
In particular, using an economic model of interconnection, we show that by refraining from regulating interconnection agreements and by allowing Internet service providers to engage in “zero rating,” the FCC has left the door open for certain anti-competitive practices to arise. In the case of interconnection, we find that unregulated competitors will optimally agree to an interconnection arrangement that permits them to earn monopoly profits. Regulatory agencies often justify relaxing regulation in the presence of a greater number of competitors. Our result indicates that a prohibition against price discrimination may be insufficient to prevent uncompetitive interconnection pricing even when competition intensifies.
We also find that firms will not engage in zero rating unless forbidden to set termination fees and that the latter practice can leave both consumers and firms worse off than if firms had been permitted to discriminate via termination fees. To the extent that practitioners continue to view zero rating as a potential anti-competitive concern — an issue that appears to have been more important to the previous administration than to the current one — our results indicate that net neutrality may have spurred firm rent seeking through zero rating.
Keywords: Broadband Internet Service Provider; Download Caps; Federal Communications Commission; Interconnection; Internet Regulation; Network Neutrality; Open Internet; Price Discrimination; Telecommunications Act
JEL Classification: K23, L13, L23, L42, L51
Suggested Citation: Suggested Citation