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

Abstract

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...

An antitrust analysis of the case for wireless network neutrality

“…5 See, for example, CTIA (2007), Hahn et al (2007), Hazlett (2007), Mayo (2008, Schwartz and Mini (2007), and Wallsten (2007). See Woroch (2004) and Owen and Rosston (2006) for a discussion of investment incentives. 6 For the purposes of this article, we treat wireless network providers as ''downstream'' firms and application, equipment and content providers as ''upstream'' firms.…”

“…For example, XOHM, the Sprint WiMAX service which has been combined with Clearwire, and Lariat Networks, a wireless internet access provider, impose acceptable use and network management policies such as restricting downloading speeds and transfer rates or limiting the number of sessions or applications of protocols. Owen and Rosston (2006) discuss how policy can affect the entry incentives of new entrants and investment incentives of incumbents. Although the Owen and Rosston analysis focuses on wireline broadband access, similar incentive issues arise in the wireless context.…”

The rise and fall of third-party high-speed access

“…and the ability of an integrated content provider to withhold content from a rival access provider (Rubinfeld and Singer, 2001). The vertical power concern was examined in the context of ''open access" proposals in congress, courts and at the FCC around 1999 and continues to be an issue now under the name of ''network neutrality" (Lemley and Lessig, 2001;Owen and Rosston, 2006).…”

Implications of Internet architecture on net neutrality

“…Deregulationists 3 [Owen and Rosston 2003;Yoo 2005] believe that ISPs are in the best position to determine the most beneficial evolution of the Internet. They expect that the Internet will become a smart network that uses traffic differentiation in order to increase the variety of the types of Internet access and applications to which customers subscribe.…”