The policy implications on net neutrality: an economic perspective

Abstract

Whether to legislate to maintain “net neutrality”, the current status quo of prohibiting broadband service providers from charging online websites for preferential access to their residential and commercial customers, has become a subject under fierce debate. We develop a stylized game-theoretic model to address two critical issues of the net neutrality: (1) who are gainers and losers of abandoning net neutrality, and (2) will broadband service providers have greater incentive to expand their capacity without net neutrality.

We find that if the principle of net neutrality is abandoned, the broadband service provider definitely stands to gain from the arrangement, as a result of extracting the preferential access fees from the content providers. The content providers are thus left worse off, mirroring the stances of the two sides in the debate. Depending on parameter values in our framework, consumer surplus either does not change or is higher, and in the latter case, while a majority of consumers are better off, a minority of them is left worse off with larger wait times to access their preferred content. The social welfare increases when compared to the baseline case under net neutrality when one content provider pays for preferential treatment, but remains unchanged when both content providers pay. We also find that the incentive for the broadband service provider to expand under net neutrality is unambiguously higher than under the no net neutrality regime. This goes against the assertion of the broadband service providers that under net neutrality, they have limited incentive to expand.