A Two-Sided Market Analysis of Provider Investment Incentives with an Application to the Net-Neutrality Issue

Abstract

We address whether local ISPs should be allowed to charge content providers, who derive advertising revenue, for the right to access end-users. We compare two-sided pricing where such charges are allowed to one-sided pricing where they are prohibited. By deriving provider equilibrium actions (prices and investments), we determine which regime is welfare-superior as a function of a few key parameters. We find that two-sided pricing is more favorable when the ratio between parameters characterizing advertising rates and end-user price sensitivity is either low or high. IntroductionToday, an Internet service provider (ISP) charges both end-users who subscribe to that ISP for their last-mile Internet access as well as content providers that are directly connected to the ISP. However, an ISP generally does not charge content providers that are not directly attached to it for delivering content to end-users. One of the focal questions in the network neutrality policy debate is whether these current charging practices should continue and be mandated by law, or if ISPs ought to be allowed to charge all content providers that deliver content to the ISP's end-users. Indeed the current network neutrality debate began when the CEO of AT&T suggested that such charges be allowed (see Whitacre, 2005).To address this question, we develop a two-sided market model of the interaction of ISPs, end-users, and content providers. The model is closely related to the existing two-sided markets literature as we detail later in this section. In our model, the ISPs play the "platform" role that intermediates the two sides: content providers and end-users. We model a "neutral"

Net Neutrality and Quality of Service

“…From this table, we can conclude that the available models do not seem to agree with each other. However, the ISPs have more incentives to invest if they are better off with no regulation, according to these studies (including [23,32] Game theoretic modeling of neutral or non-neutral networks may consider as actors that are involved in strategic interactions not only service providers and content providers but also the users as well as the advertisement sector that often represents a major source of revenue to the content providers. Not all game theoretic models studied the net neutrality problem from a non-cooperative point of view.…”

“…Musacchio, Schwartz and Walrand [32] investigate a two sided market where the CPs and the ISPs invest jointly on the network infrastructure. Each ISP is a monopoly over its end users and the CPs can be contacted by all the users.…”

“…In an on-going work, we are also considering providers' infrastructure and operating costs (as in, e.g. [32]), more complex models of end-user demand and their collective social welfare, and the effects of different options for flat-rate pricing (e.g. [33,35]).…”

Platform Competition and Access Regulation on the Internet

“…However, in a duopoly setting, the absence of net neutrality decreases the total surplus because positive access fees reduce the mass of active content providers. Musacchio et al (2009) model how zero access pricing under net neutrality regulation affects platforms' investment incentives in a two-sided market framework. They show that neutrality is desirable if the ratio of advertising revenue per click to the price elasticity of demand for Internet subscriptions is moderate.…”

On the interaction between content-oriented traffic scheduling and revenue sharing among providers

“…For example, ISPs' selective peering with other ISPs may have negative impact on Internet's connectivity. It is reported that some providers express economic complaints on revenue imbalance among them, see e.g., [2], [3]. One of the central issues regarding such complaints is how to fairly distribute the revenue from the users to the providers.…”