Net neutrality and investment decisions: comparison of Norway, the EU and the US

This paper examines the topic of net neutrality in a range of countries, with focus on Norway, the US and the EU region. It begins by examining the political settings of each country and by discussing different levels of net neutrality legislation that could be enacted. In the US there is a history of litigious behaviour and anticompetitive practices, and as a result the FCC has reclassified broadband under the telecommunications classification, known as Title II. This reclassification was enacted in order to give greater control to the regulator and be able to enforce stricter net neutrality laws, which expressly forbids blocking, throttling and paid prioritization. Europe is also strongly pro net neutrality but has a more diverse range of views, owing to the heterogeneity in the European area. Some countries support strict net neutrality, such as the Netherlands, but others, such as Germany, question the financial feasibility of the legislation. Europe also has anticompetitive practices occurring, with evidence suggesting blocking and throttling is occurring across the region. Norway has the oldest net neutrality doctrine currently in place, and has a strong history of compliance and cooperation between firms and government, and has found success with other regulations of the broadband industry that have failed elsewhere. This is partially due to the coregulatory approach Norway’s policy makers use, specifically consulting and taking input from all relevant parties, and also due to the compliance of large companies with the regulatory bodies, which is a stark contrast from the US companies. As would be expected based on this, there is no evidence of the anticompetitive practices examined in this thesis occurring in Norway. There are also differences in the existing regulation affecting the broadband market in each region. Norway has compulsory unbundling regulation in place, which is forcing any monopolistic network to rent out a portion of its capacity at a competitive price to other providers. This increases competition in the broadband market by subsidising entry and removing the competitive advantage that monopolists have. This policy was originally implemented in the US but was found to be ineffective there. In contrast, Norway and the UK both found it to be effective and plan to continue enforcing it with future networks. Some areas of the EU implement this policy, while others do not, adding to the heterogeneity of the European markets. This thesis aims to address three non-neutral strategies discussed in the literature. Firstly, blocking, which is excluding content from the market. Secondly, throttling, which is deliberately degrading the speed and quality of the internet connection for specific content. The third and final strategy is paid prioritization, which is allowing for different tiers of speeds for different prices between the Internet Service Provider (ISP) and Content Providers (CPs). In the current thesis I am using the model from the paper ‘The economics of net neutrality’ by Economides and Hermalin (2012) in order to examine the issues of blocking, throttling and paid prioritization. The model entails a continuum of CPs and households (HH) connected by a single ISP. The results show that blocking and throttling unambiguously reduce welfare. Paid prioritization is examined from a welfare perspective, both statically and dynamically under a range of market conditions. Based on this exploration, it is concluded that paid prioritization is welfare maximising in the case of perfect price discrimination by the ISP, while net neutrality is welfare maximising in the case of imperfect price discrimination. Furthermore, ISP investment is reduced by net neutrality, and with perfect price discrimination the welfare effects of net neutrality are ambiguous. The ambiguous final result allows for the possibility of different optimal regulations in each region. There are several assumptions that are embedded into the model, which temper the strength and realism of the conclusions I have drawn. These assumptions include using a multiplicatively separable preference function, the use of a single ISP, the degree of price differentiation used, and the cost curve selected for the ISP’s investment in the dynamic setting. The welfare optimal policy for each country depends crucially on the profits of the ISP compared to the consumer surplus of the HH, and thus depends on the level of competitiveness in the market. This paper then compares each country and concludes that, holding the previous relationship constant across countries, net neutrality laws are more likely to be welfare optimal in the US, while Norway is less likely to have a welfare optimal net neutrality regime