Abstract
This paper studies the efficient use of prioritization in Amazon’s Twitch.tv, taking into account the trade-off between entry and congestion. I specify and estimate supply and demand models for live video, and a congestion model. Using technological shocks, I identify congestion costs for content providers and their consumers. Using shocks in prioritization, I identify its benefits. With estimated preferences and technological parameters, I construct counterfactuals. Without congestion, demand potentially doubles. A supply-side Pigouvian tax is preferred to a demand-side one. Without prioritization, consumer welfare drops up to 10%. I consider a rent-extractive platform, and discuss parallels with net-neutrality policy.
Highlights
Like internet bandwidth, priority is a scarce resource
Proponents of net neutrality argue prioritization risks being concentrated over larger firms and that such concentration will decrease the variety of content provision, which will decrease consumer welfare
Proponents of net neutrality worry about internet service providers (ISPs) using second-degree price discrimination as a device to extract rents from innovators and content providers
Summary
Priority is a scarce resource. During periods of congestion, network managers improve the performance of private networks by prioritizing timesensitive data. On the internet at large, net neutrality prohibits internet service providers (ISPs) from installing pricing mechanisms to allocate priority efficiently, and prohibits prioritization altogether. Net neutrality is the principle that ISPs and governments should treat all data on the internet the same, not prioritizing traffic, or charging differentially by priority status, or imposing congestion charges. Proponents of net neutrality argue prioritization risks being concentrated over larger firms and that such concentration will decrease the variety of content provision, which will decrease consumer welfare. Proponents of net neutrality worry about ISPs using second-degree price discrimination as a device to extract rents from innovators and content providers. Net neutrality “levels the playing field,” and entry becomes easier for content providers at large
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