A model of Internet access when Internet connection speed is upgradable

Abstract

Using a model in which the speed of Internet connection is upgradable by service provider’s investment, we compare the results in the first-best, the second-best, and monopoly profit-maximizing situations. In the second-best, where a monopoly’s profit must be non-negative, the number of Internet users is smaller and the speed of Internet connections is slower compared with the first-best, if a marginal Internet user increases information variety and thus gives positive externalities to all Internet users. In the case where a monopoly maximizes its profit, these distortions are further magnified. We then consider possible remedies to attain the first-best.