2 NET NEUTRALITY AND INNOVATION: THEORETICAL FOUNDATIONS
2.3 OTHER PAPERS ON NET NEUTRALITY
This section mentions a few of the key theoretical but quantitative papers on net neutrality using game theory and econometrics. The only empirical paper that could be found is Laura Nurski’s “Net Neutrality, Foreclosure and the Fast Lane: An Empirical Study of the UK”108 from 2012. Nurski concludes that offering differentiated services benefits consumers, telecom operators, and content providers (specifically with advertising revenue). She says that there is little incentive for foreclosure because it reduces a broadband provider’s profits. This outcome is supported by the intuition of two-sided markets; that blocking content or services, a telecom operator attracts fewer customers and therefore suffers reduced revenue.
Nicholas Economides et al109 offer econometric models for net net neutrality with two-sided markets. They posit ISPs in the middle, consumers on one side and content providers on the other. Their models suggest ambiguous results for net neutrality rules.110 They posit arguments both for and against network neutrality, showing that consumers benefit with maximum content, but also that ISPs, if they are able to charge content providers fees, will invest in infrastructure and eliminate congestion. It is a conundrum to both allow and forbid network neutrality at the same time, so they advocate government rather than private network investment. These models assume
107 Bauer, Johannes. Book Review of Internet Architecture and Innovation by Barbara van Schewick. Telecommunications Policy 38 (2014) 406–410.
108 Laura Nurski, “Net Neutrality, Foreclosure and the Fast Lane: An Empirical Study of the UK,” SSRN Scholarly Paper (Rochester, NY: Social Science Research Network, October 1, 2012), http://papers.ssrn.com/abstract=2164382.
109 Economides, Nicholas and Benjamin E. Hermalin. “The Economics of Network Neutrality”, Rand Journal of the Economics, 2012.
110 Economides, Nicholas and Joacim Tåg. “Network Neutrality on the Internet: A Two-sided Market Analysis.” Information Economics and Policy, Vol. 2, 2012
homogeneous users and content, so results might be different under different conditions.
Cheng, Bandyopadhyay and Guo111 use game theory to model network neutrality. Both they, and Choi and Kim,112 conclude that operators have more incentive to invest under network neutrality because consumers demand more content and therefore operators need to provide more network capacity. However, they note that content providers will be worse off if they pay for content delivery than the free regime today. Supplementary work113 in 2012 by the authors concluded that departures from net neutrality can increase consumer surplus and broadband market coverage.
Mussachio, Schwartz and Walrand114 model the complexity of the problem by allowing operators to charge content providers termination fees (delivery fees) depending on a number of factors such as the content provider’s strength in earning advertising revenue, the concentration of ISPs in a given market, and the entry costs for ISPs.
Kramer and Wiewiorra115 model the effect of tiered pricing to data-heavy content providers for Quality of Service (QoS) guarantees.
They conclude that flexible pricing for content providers is the best option for infrastructure investment by ISPs in the short and long run.
111 Cheng, Hsing Kenneth, Subhajyoti Bandyopadhyay and Hong Guo. “The Debate on Net Neutrality: A Policy Perspective.” 2011.
112 Choi, Jay Pil and Byung-Cheol Kim. “Net Neutrality and Investment Incentives.”
RAND Journal of Economics. Vol. 41, No. 3, 2010.
113 Hong Guo, Hsing Kenneth Cheng, and Subhajyoti Bandyopadhyay, “Net Neutrality, Broadband Market Coverage, and Innovation at the Edge*,” Decision Sciences 43, no. 1 (February 1, 2012): 141–72,
doi:10.1111/j.1540-5915.2011.00338.x.
114 Musacchio, John, Galina Schwartz and Jean Walrand. “A Two-Sided Market Analysis of Provider Investment Incentives With an Application to the Net-Neutrality Issue.” 2009
115 Krämer, Jan and Lukas Wiewiorra. “Network Neutrality and Congestion Sensitive Content Providers: Implications for Content Variety, Broadband Investment, and Regulation.” 2012
Faulhaber notes in a number of papers116 117 118 119 120 121 that competition and technology evolution have negated the need for network neutrality legislation. He expands upon the two-sided market model, saying that it is not in the interest for an ISP to block content or favor one provider over another, as having as many content providers as possible is profit maximizing for an ISP. He gives the example of a retailer that will offer its own house brand along with competing products in order to appeal to many customers’ tastes.
He suggests that transparency, not neutrality, is what is needed to ensure an open internet, and he provides detailed suggestions on how all internet players, content and application providers as well as ISPs, should disclose information to help customers make decisions. He asks regulators to provide uniform standards for disclosure. To address monopoly behavior, regulators should use antitrust.
A complex model by Gupta et al122 considers the service-based logical architecture for overlay networks in mobile devices, which makes locating content and routing more efficient. The authors are concerned about inevitable congestion with flat-rate pricing (the one size fits all internet price) versus differentiated pricing which can
116 Faulhaber, Gerald. Robert Hahn and Hal Singer. “Assessing Competition in U.S.
Wireless Markets: Review of the FCC’s Competition Reports”. FEDERAL COMMUNICATIONS LAW JOURNAL Vol. 64 Number 2. July 11, 2011.
117 Faulhaber, Gerald. “Economics of net neutrality: A review.” Communications &
Convergence Review 2011, Vol. 3, No. 1, 53-64
118 Faulhaber, Gerald and David Farber. “Innovation in the Wireless Ecosystem: A Customer-Centric Framework.” International Journal of Communication 4 (2010).
119 Faulhaber, Gerald and David Farber. “The Open Internet: A Customer-Centric Framework.” International Journal of Communication 4 (2010).
120 Faulhaber, Gerald. “A National Broadband Plan for Our Future: A Customer-Centric Framework.” International Journal of Communication 3 (2009).
121 Faulhaber, Gerald. “Transparency and Broadband Internet Service Providers”
International Journal of Communication 4 (2010).
122 Alok Gupta et al., “An Analysis of Incentives for Network Infrastructure Investment Under Different Pricing Strategies,” Info. Sys. Research 22, no. 2 (June 2011): 215–32, doi:10.1287/isre.1090.0253.
alleviate congestion. They find that benefits are optimized to all parties under a situation of differentiated pricing and that the assumptions of net neutrality have not considered the incentives for private investment in infrastructure.
In contrast to concerns about vertical integration in content and communication networks, Owen counters123 that virtually every production process in the economy is vertically integrated, and the evidence is strong in favor of its consumer enhancing benefits.
Antitrust policy that relies on ex post evidence of harm is preferable to the prophylactic net neutrality rules which amount to restrictions on the private property of operators.
Kramer and Wiewiorra124 found that quality of service tiering may be more efficient in the short run because it better allocates the existing network capacity and in the long run because it provides higher investment incentives due to the increased demand for priority services by the entry of new congestion sensitive content providers.
The regime that provides higher incentives for infrastructure investments is more efficient in the long run.
Alexandrov and Deb125 found that under both monopoly and duopoly, if a firm cannot offer different prices for quality, then it invests less.
Society suffers overall with reduced investment, they conclude.
123 Bruce M. Owen, “Antitrust and Vertical Integration in ‘New Economy’
Industries with Application to Broadband Access,” SSRN Scholarly Paper (Rochester, NY: Social Science Research Network, November 10, 2010), http://papers.ssrn.com/abstract=1689278.
124 Jan Krämer and Lukas Wiewiorra, “Network Neutrality and Congestion Sensitive Content Providers: Implications for Content Variety, Broadband Investment, and Regulation,” Information Systems Research 23, no. 4 (Maj 2012): 1303–21, doi:10.1287/isre.1120.0420.
125 Alexei Alexandrov and Joyee Deb, “Price Discrimination and Investment Incentives,” International Journal of Industrial Organization 30, no. 6 (November 2012): 615–23, doi:10.1016/j.ijindorg.2012.07.001.
Baranes126 finds that a non-neutral regime gives advantages both for high quality content and upgrades in infrastructure from copper to fiber.
Bourreau et al127 found that investments in broadband capacity and content innovation are both higher in the non-neutral regime.
Gans & Katz128 note that net neutrality may harm efficiency by distorting both ISP and content provider investment and service-quality choices.
Greenstein et al129 find “little support for the bold and simplistic claims of the most vociferous supporters and detractors of net neutrality.” Similar to this paper, they note the importance legal instrument (“precise policy choice”) and how it is implemented. The say the outcome a question of long-run economic trade-offs for which there is no experience or consensus expectation.