Can competition-enhancing regulation bridge the quality divide in Internet provision?

Abstract

About 3.5 billion individuals, half of the world's population, were estimated to be using the Internet in 2017. However, their ability to use services such as cloud computing, VoIP, media streaming, high-frequency trading, network gaming, video conferencing and telemedicine, are sensitive to the network quality of service (QoS). We examine the effects of pro-competition regulation on Internet QoS - a measure of digital divide - using 23 indicators of competition from a panel of 160 countries covering 2008–2016. We find that pro-competition regulations had a stronger positive effect on QoS in developed countries compared to developing ones. A one-point increase in the pro-competition score increases QoS, measured as average connection speed, by at least 200 kbps in developed countries. Our results control for supply and demand factors, as well as country-fixed effects. The results are also robust to different measures of average connection speed. We attribute this variation to difficulties in the contracting environment in developed and developing countries, consistent with Levy and Spiller (1996). Countries with better institutional endowments – associated with developed economies - are better able to design and enforce complex regulatory contracts compared to developing countries. Ironically, this means that more pro-competition rules on paper will not necessarily narrow the digital divide between developed and developing countries and that there is a need to consider minimum quality standards as a means to effect improved Internet QoS.