Net Neutrality and Market Power: Economic Welfare with Uniform Quality of Service

Abstract

We compare the economic efficiency of imposing a “zero price rule” on Broadband Internet Service Providers (BISPs) with the economic efficiency associated with allowing the BISP to charge Content and Application Service Providers (CASPs) a non-discriminatory uniform price for “interacting” with their subscribers. The local broadband service market is structured as a stylized two-sided market where a BISP facilitates “interactions” between subscribers and CASPs. Participants on one side of the market differ in their willingness to pay to “interact” with participants on the other side of the market. Efficiency is measured by the extent to which market forces lead to the completion of the most valuable set of interactions given the cost the BISP incurs from completing those interactions and the regulatory environment. Under these conditions, a “zero price rule” enhances total surplus if and only if it prevents the BISP from otherwise reducing output with the objective of enhancing its own profits. Such would be the case if the BISP’s ability to establish supra-competitive prices on the CASP side of the market exceeds its ability to establish such prices on the subscriber side of the market. If market forces induce the BISP to establish competitive prices on each side of the market, then welfare is promoted in our stylized model if the BISP is allowed to set such prices on each side of the market.