Why We Should Expect Net Neutrality To Actually Reduce the Amount of Entrant Content on the Web

Transcription

1 Why We Should Expect Net Neutrality To Actually Reduce the Amount of Entrant Content on the Web January 5, 2011 Eric Rasmusen Abstract The policy of Net Neutrality would require an internet service provider to charge the same price per amount of service used regardless of the material transmitted or the identity of the transmitter. Net Neutrality is supported by transmitters (e.g. Netflix) and opposed by internet service providers (e.g. Comcast). I argue that the transmitters do not understand their own interest. Without net neutrality, Comcast would be free to charge Netflix a high price for transmitting its movies. This would give Comcast an incentive to increase Netflix s volume. With net neutrality, Comcast cannot make that extra profit from Netflix, and has incentive to instead develop its own, less efficient, rental business, bundle it with its basic service, and raise the price of basic service. The bundling would drive Netflix from the market. Net neutrality is in fact worse for everyone: Comcast, Netflix, and consumers. Rasmusen: Dan R. and Catherine M. Dalton Professor, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University. BU 438, 1309 E. 10th Street, Bloomington, Indiana, (812) Fax: erasmuse@indiana.edu, http: // This paper: Keywords: Net neutrality, bundling

2 I would like to thank xxx for helpful comments. 1

3 2 1. Introduction I attach a comment on 1 A Numerical Example This will illustrate that if an ISP is allowed to price its service as high as it wants, but is forbidden to charge content providers different rates, that restriction will end up hurting consumers, content provider, and ISP. The essential idea is that if the ISP can charge outside content providers more, it has less incentive to provide content itself and charge a lot by bundling that with basic ISP service. If it cant charge the content providers more, it will raise the price of basic ISP service and then provide the extra content itself, for free. Thus, unless the regulation regulated not just the price for content, but imposed price regulation of basic ISP service, the unintended consequence will be to increase the amount of ISP-provided content and reduce the amount of outside content. Heres how that would work. Suppose there is a monopoly Internet Service Provider (ISP), Comcast. Comcast also sells Comcast Movies. Netflix sells Netflix Movies. 90% of consumers want movies. Consider two regulatory regimes. In Regime I, Comcast can charge Netflix for getting access to consumers. In Regime II, Comcast cannot. I will show, surprisingly, that Netflix should prefer Regime I. In either regime Comcast, as a monopoly, will charge consumers as much as traffic will bear for ISP connection. Lets suppose the value of ISP for general web access is $40 per month for each consumer. In Regime I, $40 is what Comcast will charge. It will charge extra for Comcast Movies, and it will charge extra for Netflix Movies. Lets suppose Comcast decides to charge $15 for Comcast Movies and $5 for 1 Netflix Shares Gain On Net Neutrality Vote, The Wall Street Jouranl, DECEMBER 21, 2010,, html.

4 Netflix movies, which makes consumers indifferent between Comcast and Netflix. It could either charge the consumer $5 to get access to Netflix, or Netflix $5 to get access to the consumer there is no real difference. Netflix, of course, charges the consumer too perhaps $10. In Regime II, Comcast cannot charge consumers for using Netflix. Thus, it wants consumers to buy Comcast Movies, instead of being indifferent because it earns equal profits from Comcast and Netflix Movies. What Comcast can do in Regime II is to charge $55 for ISP access, $0 for Comcast Movies, and $0 for Netflix Movies. Since consumers are getting Comcast Movies bundled with their ISP service, they wont be willing to pay anything extra for Netflix. The 10% of consumers who dont like movies will drop their Internet service entirely, but Comcast will make enough money from the $15 surcharge on the rest to make up for them. In Regime II, since it is illegal for Comcast to earn any profit from Netflix, Comcast decides to drive Netflix from the market. Netflix will do worse than under Regime I. Consumers will do worse. And even Comcast will do worse. References Armstrong, M. (2006): Competition in two-sided markets, RAND Journal of Economics, 37, Caves, K. W. (2010): Modeling the welfare effects of net neutrality regulation: A comment on Economides and Tag, Working Paper, available at abstract= Chen, M. K. and B. Nalebuff (2006): One-way essential complements, Cowles Foundation Discussion Paper No. 1588, Yale School of Management. 3

5 4 Cheng, H. K., S. Bandyopadhyay, and H. Guo (forthcoming): The debate on net neutrality: A policy perspective, Information Systems Research. Chipty, T. (2001): Vertical integration, market foreclosure, and consumer welfare in the cable television industry, American Economic Review, 91, Choi, J. P. and B.-C. Kim (forthcoming): Net neutrality and investment incentives, RAND Journal of Economics. Economides, N. (2008): Net-neutrality, non-discrimination and digital distribution of content through the Internet, I/S: A Journal of Law and Policy for the Information Society, 4, Economides, N. and J. Tag (2009): Net neutrality on the Internet: A two-sided market analysis, Working Paper, Stern School of Business, New York University. Hermalin, B. E. and M. L. Katz (2007): The economics of productline restrictions with an application to the network neutrality debate, Information Economics and Policy, 19, Kocsis, V. and P. W. de Bijl (2007): Network neutrality and the nature of competition between network operators, International Economics and Economic Policy, 4, Kramer, J. and L. Wiewiorra (2010): Network neutrality and congestion-sensitive content providers: Implications for service innovation, broadband investment and regulation, Working Paper, Karlsruhe Institute of Technology. Lee, R. S. and T.Wu (2009): Subsidizing creativity through network design: Zeropricing and net neutrality, Journal of Economic Perspectives, 23, Musacchio, J., G. Schwartz, and J. Walrand (2009): A two-sided market analysis of provider investment incentives with an application to the net-neutrality issue, Review of Network Economics, 8, 2239.

6 Prufer, J. and E. Jahn (2007): Dark clouds over the Internet, Telecommunications Policy, 31, Rey, P. and J. Tirole (2007): A primer on foreclosure, in M. Armstrong and R. Porter, eds., Handbook of Industrial Organization, volume 3, North Holland: Elsevier, Rochet, J.-C. and J. Tirole (2003): Platform competition in twosided markets, Journal of the European Economic Association, 1, Rochet, J.-C. and J. Tirole (2006): Two-sided markets: A progress report, RAND Journal of Economics, 37, FCC proceeding , In the Matter of Preserving the Open Internet Broadband Industry Practices. Schuett, Florian (2010) Network Neutrality: A Survey of the Economic Literature, Review of Network Economics: Vol. 9 : Iss. 2, Article 1. Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality Robin S. Lee and Tim Wu Journal of Economic PerspectivesVolume 23, Number 3Summer 2009Pages 6176 Rasmusen, Eric (2010) A Numerical Example Illustrating the Economic Theory of How Regulation Intended to Bring Net Neutrality Can Actually Increase Discrimination, Comment to the Federal Communications Commission (March 11, 2010). Tim Wu Network Neutrality, Broadband Discrimination, Journal of Telecommunications and High Technology Law, Vol. 2, p. 141, 2003 Towards an Economic Framework for Network Neutrality Regulation Dr.-Ing. Barbara van Schewick1 5