Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 727: Network Neutrality on the Internet: A Two-sided Market Analysis

Nicholas Economides () and Joacim Tåg ()
Additional contact information
Nicholas Economides: Stern School of Business
Joacim Tåg: Research Institute of Industrial Economics (IFN), Postal: and Swedish School of Economics and Business Administration, FDPE, and HECER., Arkadiankatu 7, 00101 Helsinki, Finland

Abstract: We discuss the benefits of net neutrality regulation in the context of a two-sided market model in which platforms sell Internet access services to consumers and may set fees to content and applications providers "on the other side" of the Internet. When access is monopolized, we find that generally net neutrality regulation (that imposes zero fees "on the other side" of the market) increases total industry surplus compared to the fully private optimum at which the monopoly platform imposes positive fees on content and applications providers. Similarly, we find that imposing net neutrality in duopoly increases total surplus compared to duopoly competition between platforms that charge positive fees on content providers. We also discuss the incentives of duopolists to collude in setting the fees "on the other side" of the Internet while competing for Internet access customers. Additionally, we discuss how price and non-price discrimination strategies may be used once net neutrality is abolished. Finally, we discuss how the results generalize to other two-sided markets.

Keywords: Net Neutrality; Two-sided Markets; Internet; Monopoly; Duopoly; Regulation; Discrimination

JEL-codes: C63; D40; D42; D43; L10; L12; L13

23 pages, First version: January 15, 2008. Revised: November 9, 2011.

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