Modeling the Welfare Effects of Net Neutrality Regulation: A Comment on Economides and Tåg

Abstract

In a recent working paper, Nicholas Economides and Joacim Tag analyze stylized models of two-sided markets in an attempt to assess the welfare effects of net neutrality. Alternate versions of the model are developed for ISP services offered by a monopoly and a duopoly. According to the models, the only unambiguous beneficiaries of net neutrality regulation are content providers: Consumers are unambiguously worse off under net neutrality, while the effect on platform operators is ambiguous. For certain ranges of the model parameters, net neutrality is surplus-enhancing, as the gains to content providers (and possibly platform operators) outweigh the losses to consumers (and possibly platform operators). For other parameter values, net neutrality reduces total surplus. I show that the model also implies the empirically tenuous condition that the ratio of aggregate content provider profits to aggregate platform operator profits must be strictly less than 0.4 under net neutrality; for many parameter values, the ratio is significantly smaller. If a more realistic profit ratio is imposed, the authors’ proof that net neutrality is surplus-enhancing no longer holds. I employ numeric simulations to decompose the factors underlying this reversal. The results indicate that net neutrality may function as a vehicle for transferring surplus from consumers and platform operators to content providers, rather than creating surplus. The losses sustained by consumers and platform operators under net neutrality outweigh any gains enjoyed by content providers as the profit ratio is adjusted to less empirically implausible levels, which leads to deadweight loss under net neutrality.