Effects of vertical integration on internet service providers’ zero-rating choice

Abstract

This study presents investigation of the effects of vertical integration between an internet service provider (ISP) and a content provider (CP) on the ISP’s zero-rating choice and social welfare. We develop a simple model in which a monopolistic ISP delivers content from two CPs to a representative consumer. The ISP can offer zero-rating contracts to one or two CPs, thereby allowing the consumer to use zero-rated content without consuming monthly data usage. We investigate how integration between the ISP and a CP affects the ISP’s zero-rating choice and social welfare. Our findings are the following. First, the vertically integrated ISP might zero-rate the unaffiliated CP exclusively when the CPs’ profitability is not so low. Second, the integration increases the total surplus and the independent CP’s profit. Our results indicate that vertical integration is welfare enhancing and beneficial to the independent CP.