Investment in Two-Sided Markets and the Net Neutrality Debate
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Ozdaglar_Investment in.pdf
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Author(s)
Njoroge, Paul
Weintraub, Gabriel Y.
Ozdaglar, Asuman E.
Stier-Moses, Nicolas E.
Date Issued
February 2014
Journal
Review of Network Economics
Publisher
Walter de Gruyter
Citation
Njoroge, Paul, Asuman Ozdaglar, Nicolas E. Stier-Moses, and Gabriel Y. Weintraub. “Investment in Two-Sided Markets and the Net Neutrality Debate.” Review of Network Economics 12, no. 4 (January 14, 2014).
Version
Original manuscript
Abstract
This paper develops a game-theoretic model based on a two-sided market framework to compare Internet service providers’ (ISPs) investment incentives, content providers’ (CPs) participation, and social welfare between neutral and non-neutral network regimes. We find that ISPs’ investments are driven by the trade-off between softening consumer price competition and increasing revenues from CPs. Specifically, investments are higher in the non-neutral regime because it is easier to extract revenue through appropriate CP pricing. On the other hand, participation of CPs may be reduced in a non-neutral network due to higher prices. The net impact of non-neutrality on social welfare is determined by which of these two effects is dominant. Overall, we find that the non-neutral network is always welfare superior in a “walled-gardens” model, while the neutral network is superior in a “priority lanes” model when CP-quality heterogeneity is large. These results provide useful insights that inform the net-neutrality debate.
MIT Department
Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science
Massachusetts Institute of Technology. Laboratory for Information and Decision Systems
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DOI of Published Version
https://doi.org/10.1515/rne-2012-0017
