Two sided markets and efficiency in the Internet

Abstract

Competition between network providers is believed to be a necessary condition for an efficient functioning Internet industry. It spurs technology innovation as network providers compete to provide better quality and enhanced services; improving consumers' welfare in the process. Given the impact of competition, it is important for policy makers to understand how the institutional structures, interconnection agreements, market and regulatory environment in the Internet affect it. This will help in crafting of policies that enhance investments and deployment of new technologies in networks, foster development of new applications by content providers as well as safeguard consumer interests. This thesis investigates how access charges and market regulations affect competition, and consequently technological investments and welfare. The first part of this thesis investigates competition between network providers under an interconnection agreement in which networks charge each other a reciprocal access charge (in the presence of congestion) using a two-sided market framework. Primarily, we look at how the access charge, congestion costs and two-sidedness of the market features in the strategic decision that the network providers take into account in setting their prices. In addition, we study how the access charge affects consumer enrollment and consequently its effect on social welfare. In particular, we investigate whether the current "bill and keep" practice employed in the Internet is an efficient interconnection agreement. The second part of the thesis studies network neutrality and its effects on competition and network quality investments. Defining a neutral network as one in which network providers only charge content providers connected to them and a non-neutral network as one in which network providers are allowed to charge all content providers that deliver content to the network's consumers, we investigate the effect of these different pricing structures on platform investment patterns and consequently social welfare. Current debate is composed of two camps: On one hand are content and application providers who would like to see the Internet regulated and on the other are network providers who would like it to stay de-regulated. The former claim that the price differentiation by network providers, which is allowed under a de-regulated market, would not only erect barriers to new entrants but would also reduce innovation by current content and application providers. In contrast, network providers oppose such regulation on the grounds that it will hinder investment in network infrastructure because they will have no incentive to invest. The implications of net neutrality regulation on network provider investment incentives, social welfare and market structure is not well understood. We develop a competition model that aims to investigate the above economic issues under both a regulated(neutral) and de-regulated(non-neutral regime). Again the competition framework is based on two-sided markets. Our competition model also contributes to the literature on two-sided markets by considering competition in interconnected platforms (network providers are abstractly viewed as platforms). Classical two sided markets usually consider closed platforms, i.e., platform end users only benefit from subscribers to that platform. However, in both our competition models, participants of one platform benefit from the presence of participants on their platforms as well as from the off-net platforms (because of the interconnection). In addition, we also consider investment decisions by the platforms, by showing the mechanism by which investment decisions in interconnected platforms are made.