The Efficiency Risk of Network Neutrality Rules
Phoenix Center Policy Bulletin No. 16
16 Pages Posted: 22 Aug 2006
Date Written: May 2006
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: Suggested Citation