The Efficiency Risk of Network Neutrality Rules

Phoenix Center Policy Bulletin No. 16

16 Pages Posted: 22 Aug 2006

See all articles by George S. Ford

George S. Ford

Phoenix Center for Advanced Legal & Economic Public Policy Studies

Thomas Koutsky

USAID Global Development Lab

Lawrence J. Spiwak

Phoenix Center for Advanced Legal & Economic Public Policy Studies

Date Written: May 2006

Abstract

In this Policy Bulletin, we evaluate Network Neutrality proposals from the standpoint of consumer welfare and economic efficiency by presenting a cost/benefit analysis framework for examining the effect on consumers of Network Neutrality proposals that would limit operators from injecting intelligence into broadband Internet access networks. For a Network Neutrality proposal to be justified, the purported benefits of that proposal must exceed the costs, including the inefficiency in network design as well as the risk of increased industry concentration and market power. Publicly available cost studies show that if IP video services increase in popularity, the cost of providing a residential subscriber a "stupid" network that is video-capable could reach $300 to $400 per month more than an "intelligent" network, which would certainly put broadband out of the reach of many Americans. We also present a simple model which shows that voluntary investments in network efficiency always improve consumer and social welfare - even if, as some Network Neutrality proponents contend, stupid networks are otherwise preferred by consumers.

Keywords: Network Neutrality, stupid network

JEL Classification: K20, K23, L10, L50, L51, L52, L96, L98

Suggested Citation

Ford, George S. and Koutsky, Thomas M. and Spiwak, Lawrence J., The Efficiency Risk of Network Neutrality Rules (May 2006). Phoenix Center Policy Bulletin No. 16, Available at SSRN: https://ssrn.com/abstract=925347 or http://dx.doi.org/10.2139/ssrn.925347

George S. Ford

Phoenix Center for Advanced Legal & Economic Public Policy Studies ( email )

5335 Wisconsin Avenue, NW
Suite 440
Washington, DC 20015
United States

Thomas M. Koutsky

USAID Global Development Lab ( email )

1300 Pennsylvania Avenue NW
Washington, DC 20577
United States

Lawrence J. Spiwak (Contact Author)

Phoenix Center for Advanced Legal & Economic Public Policy Studies ( email )

5335 Wisconsin Avenue, NW
Suite 440
Washington, DC 20015
United States
202-274-0235 (Phone)
202-318-4909 (Fax)

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