THE VERTICAL INTEGRATION OF CONTENT AND BROADBAND SERVICES: THE NET NEUTRALITY DEBATE

Whether broadband service providers should be allowed to vertically integrate with content providers is a contentious issue, especially from the net neutrality perspective, since the vertically integrated firm can prioritize the delivery of its own content at the expense of that of its competitors if net neutrality is not enforced. We analyze the issues of vertical integration of content and broadband services surrounding this debate from an economic perspective, using a game-theoretic model. Our analysis establishes the various equilibria in the game, and shows that if net neutrality is not enforced, social welfare might – depending on parameter values – increase or decrease with vertical integration. Interestingly, we find that it is not always true that the ISP will always degrade the delivery of the competing content, and in fact will sometimes have the incentive to prioritize the latter over its own

Local Broadband Access: Primum Non Nocere or Primum Processi - A Property Rights Approach

High-speed or "broadband" Internet access currently is provided, at the local level, chiefly by cable television and telephone companies, often in competition with each other. Wireless and satellite providers have a small but growing share of this business. An influential coalition of economic interests and academics have proposed that local broadband Internet access providers be prohibited from restricting access to their systems by upstream suppliers of Internet services. A recent term for this proposal is "net neutrality." We examine the potential costs and benefits of such a policy from an economic welfare perspective. Using a property rights approach, we ask whether transactions costs in the market for access rights are likely to be significant, and if so, whether owners of physical local broadband platforms are likely to be more or less efficient holders of access rights than Internet content providers. We conclude that transactions costs are likely to be lower if access rights are assigned initially to platform owners rather than content providers. In addition, platform hardware owners are likely to be more efficient holders of these rights because they can internalize demand-side interactions among content products. Further, failure to permit platform owners to control access threatens to result in inadequate incentives to invest in, to maintain, and to upgrade local broadband platforms. Inefficiently denying platform owners the ability to own access rights implies a need for price regulation; otherwise, there will be incentives to use pricing to circumvent the constraint on rights ownership. Price regulation is itself known to induce welfare losses through adaptive behavior of the constrained firm. The impact on welfare might produce a worse result than the initial problem, assuming one existed. Much of the academic interest in net neutrality arises from the belief that the open architecture of the Internet under current standards has been responsible for its remarkable success, and a wish to preserve this openness. We point out that the openness of the Internet was an unintended consequence of its military origins, and that other, less open, architectures might have been even more successful. A policy of denying platform owners the ability to own access rights could freeze the architecture of the Internet, preventing it from adapting to future technological and economic developments. Finally, we examine the net neutrality issue from the perspective of the "essential facility doctrine," a tool of the common law of antitrust. The doctrine establishes conditions under which federal courts will mandate access by competitors to the monopoly platform of a vertically-integrated firm. Because local broadband Internet access is not today a bottleneck monopoly (there are several competitors and the market is at an early stage of development), the essential facilities doctrine would not permit reassignment of access rights from platform owners to competitors. We conclude that "net neutrality" is a welfare-reducing policy proposal.Technology and Industry, Regulatory Reform

Net Neutrality as Global Principle for Internet Governance

This paper discusses the concept of network neutrality (NN) and explores its relevance to global Internet governance. The paper identifies three distinct ways in which the concept of network neutrality might attain a status as a globally applicable principle for Internet governance. The paper concludes that the concept of a "neutral" Internet has global applicability in a variety of contexts relevant to Internet governance

Addressing the Next Wave of Internet Regulation: The Case For Equal Opportunity

In October 2009, the Federal Communications Commission released a Notice of Proposed Rule Making in which it asked for guidance on how to convert a principle of “nondiscrimination on the Internet” into a practical rule for broadband service providers. The ultimate formulation of the nondiscrimination principle could have a significant economic effect on economic welfare in the short term and on innovation. In this paper, we explain the economics of discrimination and offer a new approach for identifying anticompetitive discrimination. Discrimination raises concerns when it interferes with what is often referred to as “equality of opportunity.” However, the Commission’s proposed nondiscrimination policy, which would limit the ability of service providers and content providers to contract on terms that (1) are mutually agreeable to both parties, (2) are available to all prospective consumers, and (3) do not impose significantly externalities on third parties, is inimical to promoting equality of opportunity. Moreover, given the twosided nature of the Internet access market, a blanket rule forbidding broadband service providers from offering quality of service to content providers (and charging for it) would likely harm endusers and certain content providers.

Net Neutrality and Investment Incentives

This paper analyzes the effects of net neutrality regulation on investment incentives for Internet service providers (ISPs) and content providers (CPs), and their implications for social welfare. We show that the ISP’s decision on the introduction of discrimination across content depends on a potential trade-off between network access fee and the revenue from the trade of the first-priority. Concerning the ISP’s investment incentives, we find that capacity expansion affects the sale price of the priority right under the discriminatory regime. Because the relative merit of the first priority, and thus its value, becomes relatively small for higher capacity levels, the ISP’s incentive to invest on capacity under a discriminatory network can be smaller than that under a neutral regime where such rent extraction effects do not exist. Contrary to ISPs’ claims that net neutrality regulations would have a chilling effect on their incentive to invest, we cannot dismiss the possibility of the opposite.net neutrality, investment (innovation) incentives, queuing theory, hold-up problem, two-sided markets, vertical integration

An Antitrust Analysis of the Case for Wireless Network Neutrality

The ongoing debate about possible implementation of regulatory rules requiring “network neutrality” for wireless telecommunications services is inherently about whether to impose a prohibition on the ability of network operators to control their vertical relationships. Antitrust analysis is well suited to analyze whether a wireless network neutrality rule is socially beneficial. Implementing network neutrality rules would be akin to using a per se antitrust rule regarding vertical relationships instead of the rule of reason analysis typically applied to vertical relationships in antitrust. Per se rules are used to prevent actions that rarely, if ever, have any pro-competitive benefits, such as price-fixing agreements. Rule of reason analysis is used when there are potential efficiency gains from the actions under investigation. Some vertical practices of the wireless carriers, such as bandwidth restrictions, may appear to be anticompetitive, but may also have plausible efficiency justifications so should be judged under rule of reason analysis. Economic examination of the wireless industry shows significant competition between networks which reduces the concern about vertical relationships, but some areas that should be monitored by antitrust and regulatory authorities. We propose several regulatory changes that would likely increase wireless competition and lessen the perceived need for prophlactic network neutrality rules while at the same time allowing efficiency-enhancing vertical relationships.network neutrality, wireless internet, antitrust,

Shooting in the Dark -- Owen Comments Waikiki Conference

Only when we understand why open access is necessary can we design an implementation that is responsive to the particular form of market failure that gives rise to the need for regulatory intervention. Otherwise, we are “shooting in the dark.” There are at least two equal access issues: First, should competitors have equal access to each other’s facilities, and second, should competitors have equal access to each other’s entertainment and other content. The answers depend on whether such departures from normal competition policy would enhance consumer welfare. Normal competition policy is to rely on market forces to allocate resources in a way that enhances consumer welfare. Competition generally produces supplier incentives that are compatible with welfare maximization. Centralized allocation and regulation in principle can mirror these incentives, but requires information not usually available to those in charge of the intervention. Regulators are also subject, by design, to political influence.Net neutrality, open access