network neutrality on the internet: a two-side market analysis

NETWORK NEUTRALITY ON THE INTERNET: A TWO-SIDE MARKET ANALYSIS

Nicholas Economides, Joacim Tag

張厚望X1012159

INTRODUCTION ISP(Internet Service Provider) Platform (a telephone company such as AT& T)

Consumers

Content and Application providers

(such as Google, Yahoo, MSN, or Disney)

RELATIONSHIP

NETWORK NEUTRALITY Under network neutrality means s = 0.

BACKGROUND Since the inception of the Internet, information

packets are transferred on the Internet under “network neutrality.”

ED Whitacre ,AT& T’s CEO, “Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it.”

In terms of pricing, this would imply that content and application providers(such as Google, Yahoo, or MSN) would be forced to pay the platform to ensure that the consumers can access their services.

DEPARTURE FORM NETWORK NEUTRALITY

Primary consequence It will introduce the possibility for prioritization,

which may enhance the arrival time of information packets from paying content firms, and may degrade the arrival time of non-paying firms.

MAIN POINT Only concentrate on the issue of one-sided versus

two-sided pricing. Only concentrate on the platform monopoly versus

duopoly platforms. Ignore some issues (such as dynamic investment

incentives, price discrimination).

PLATFORM MONOPOLY

A platform sells Internet access to consumers at a subscription price p and collets a fee s from each content provider to allow the content to reach the consumers.

VALUE Consumers Content Providers Demand

CONSUMERS A consumer is i. xi i’s location t Consumers pay a transportation cost

equal to t per unit of distance “traveled”. ncp the number of active content providers b value (network effect) of extra content

provider to a consumer Consumer i’s utility is specified as

i cp iu v bn tx p

CONTENT PROVIDERS A content provider is j. a value (network effect) of an extra

consumer to a content provider nc the number of consumers yj the index of content provider’s location

A content provider j’s profit is

j c jan s fy

DEMAND

( )( , )cf v p bsn p sft ab

( )( , )cpa v p tsn p sft ab

MONOPOLY PLATFORM OPTIMUM We assume that the cost of providing platform

service is c per consumer. The platform faces the problem of choosing p and s

to maximize

( , ) ( ) ( , ) ( , )c cpp s p c n p s sn p s

0p

( ) ( )( )2

f v c a b sp sf

0s

( )( )2

av bc a b ps pt

( , ) ( ) ( , ) ( , )c cpp s p c n p s sn p s

The profits of the monopoly are

2 2

2

(2 )( )4 ( )

M ft ab v c b c a vpft a b

2

( ) ( )4 ( )

M a b f v csft a b

2

2

( )4 ( )

M f v cft a b

MONOPOLY PLATFORM PRICING UNDER NETWORK NEUTRALITY REGULATION Under network neutrality means s = 0.

The platform is now to maximize

The platform’s profits are

( )NNcp c n

2( )4 4

NN f v cft ab

WELFARE IMPLICATIONS We will show that three exist parameter values.

1. profits of platform2. surplus of consumer3. profits of content provider4. total surplus

SOCIAL OPTIMUM WITH A MONOPOLY PLATFORM Platform’s profits

Consumers’ surplus

Content providers’ profits

( , )p s

( , ) ( ) ( , ) ( , )c cpp s p c n p s sn p s

( , )cCS p s( , )

0( , ) ( ( , ) )cn p s

c cpCS p s v bn p s tx p dx

( , )

0( ( , ) )cpn p s

cp can p s fy s dy cp

Total surplus defined as ( , )TS p s

( , ) ( , ) ( , ) ( , )c cpTS p s p s CS p s p s

WELFARE IMPLICATIONS OF IMPOSING NETWORK NEUTRALITY Under network neutrality means s = 0.

Starting with network neutrality, consider the impact of removing network neutrality regulation.

PROFITS OF PLATFORM

The profits of the platform are higher when it is unconstrained.

0M NN

SURPLUS OF CONSUMER

The surplus of consumer is higher when network neutrality regulation is removed.

0M NNc C CCS CS CS

PROFITS OF CONTENT PROVIDER

The profits of the content provider are lower when network neutrality regulation is removed.

0M NNcp cp cp

TOTAL SURPLUS

0M NNTS TS TS

CONCLUSION Total surplus is higher under network neutrality ( s

= 0 ), in other words, the network neutrality increases total surplus.

Content sector has higher profits and more content providers are active in network neutrality.

Platform and consumers are better off with out net neutrality.

DUOPOLY PLATFORMS WITH MULTI-HOMING CONTENT PROVIDER We now extend our model to duopoly competition

between two platforms. Each consumer buys Internet access from one

platform only. Content providers, however, are assumed to multi-

home.

RELATIONSHIP

CONCLUSION Total surplus is higher in network neutrality. Content sector and the platforms have higher

profits, but consumers are worse off under network neutrality.

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