Network Neutrality and Foreclosing Market Exchange: Transaction Cost Analysis

Phoenix Center Policy Paper No. 28

24 Pages Posted: 16 Mar 2007

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: March 2007

Abstract

In this Policy Paper, we analyze the effects of "network neutrality" proposals that seek to mandate an inflexible set of rules that would foreclose or severely limit many market transactions. Our model reveals that under plausible conditions, rules that prohibit efficient commercial transactions between content and broadband service providers could, in fact, be bad for all participants: consumers would pay higher prices, the profits of the broadband service provider would decline, and the sales of Internet content providers would also decline. Moreover, rules that prohibit the market from contracting efficiently may shift sales from content providers to the broadband provider's content affiliate, a result entirely inconsistent with the stated desire of network neutrality proponents. As the model shows, these unintended consequences of such network neutrality rules are the result of shifting costs to consumers that are more efficiently borne in the exchange between content and broadband providers. While proponents of such regulation may view it as protection from alleged anticompetitive behavior by broadband service providers, such proposals also eliminate the potential for efficient, voluntary, welfare-improving market transactions.

Keywords: Network Neutrality, two-sided markets, transaction cost economics

JEL Classification: K20, K23, L14, L22, L50, L51, L96, L98

Suggested Citation

Ford, George S. and Koutsky, Thomas M. and Spiwak, Lawrence J., Network Neutrality and Foreclosing Market Exchange: Transaction Cost Analysis (March 2007). Phoenix Center Policy Paper No. 28, Available at SSRN: https://ssrn.com/abstract=970799 or http://dx.doi.org/10.2139/ssrn.970799

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)

HOME PAGE: http://www.phoenix-center.org

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