Network neutrality on the internet: A two-side market analysis

1. Network neutrality on the internet: A two-side market analysis Nicholas Economides, Joacim Tag 張厚望 X1012159

2. 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)

3. Relationship

4. Network Neutrality • Under network neutrality means s = 0.

5. Background • Since the inception of the Internet, information packets are transferred on the Internet under “network neutrality.”

6. 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.”

7. 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.

8. 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.

9. 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).

10. Platform Monopoly • A platform sells Internet access to consumers at a subscription price p and collets a fee sfrom each content provider to allow the content to reach the consumers.

11. Value • Consumers • Content Providers • Demand

12. Consumers • A consumer is i. • xii’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

13. 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

14. Demand

15. 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

17. The profits of the monopoly are

18. Monopoly Platform Pricing Under Network Neutrality Regulation • Under network neutrality means s = 0. • The platform is now to maximize • The platform’s profits are

19. Welfare Implications • We will show that three exist parameter values. 1. profits of platform 2. surplus of consumer 3. profits of content provider 4. total surplus

20. Social Optimum With A Monopoly Platform • Platform’s profits • Consumers’ surplus • Content providers’ profits

21. Total surplus defined as

22. Welfare Implications of Imposing Network neutrality • Under network neutrality means s = 0. • Starting with network neutrality, consider the impact of removing network neutrality regulation.

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

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

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

26. Total surplus

27. 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.

28. 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.

29. Relationship

30. Conclusion • Total surplus is higher in network neutrality. • Content sector and the platforms have higher profits, but consumers are worse off under network neutrality.

31. Thank you