Network Neutrality and Foreclosing Market Exchange: Transaction Cost Analysis

Abstract

In this Policy Paper, we analyze the effects of proposals that seek to mandate an inflexible set of rules that would foreclose or severely limit many market transactions. Our model reveals that under plausible conditions, rules that prohibit efficient commercial transactions between content and broadband service providers could, in fact, be bad for all participants: consumers would pay higher prices, the profits of the broadband service provider would decline, and the sales of Internet content providers would also decline. Moreover, rules that prohibit the market from contracting efficiently may shift sales from content providers to the broadband provider's content affiliate, a result entirely inconsistent with the stated desire of network neutrality proponents. As the model shows, these unintended consequences of such network neutrality rules are the result of shifting costs to consumers that are more efficiently borne in the exchange between content and broadband providers. While proponents of such regulation may view it as protection from alleged anticompetitive behavior by broadband service providers, such proposals also eliminate the potential for efficient, voluntary, welfare-improving market transactions.