Net Neutrality, Exclusivity Contracts, and Internet Fragmentation

Abstract

Net neutrality is believed to prevent Internet fragmentation. We examine the relationship between net neutrality regulation and Internet fragmentation in a game-theoretic model that considers the interplay between termination fees, exclusivity and competition between two Internet Service Providers (ISPs) and between two Content Providers (CPs). An exclusivity arrangement between an ISP and a CP reduces the CP's exposure to some end users but it also reduces competition among the CPs. Fragmentation arises in equilibrium when competition between CPs is very strong, the CPs'revenues from advertisements are very low, the content of the CPs is highly complementary, or the termination fees are high. We …nd that the absence of fragmentation is always bene…cial for consumers, as they can enjoy all available content. Policy interventions that prevent fragmentation are thus good for consumers. However, results for total welfare are more mixed. A zero-price rule on tra¢ c termination is neither a su¢ cient nor a necessary policy instrument to prevent fragmentation. In fact, regulatory interventions may be ine¤ective or even detrimental to welfare and are only warranted under special circumstances.Keywords: Net neutrality; Internet fragmentation; Exclusivity. JEL Codes: L13; L51; L52; L96.We thank Marc Bourreau, Bruno Jullien and Thibaud Vergé for very useful discussions and comments.

The exclusion of competing one-way essential complements: Implications for net neutrality

“…Since they are always better off under the net neutrality/no-fragmentation equilibrium, this type of exclusivity agreement is always detrimental to consumers but may be good for total welfare if it increases sufficiently profits and does not reduce consumer surplus too much (Proposition 8). Kourandi et al (2015) find similar conclusions (see pp.6-7 for more details).…”

“…Their crucial insight is that the decreasing marginal value of advertising may lead ISPs to fragment the internet to protect "their" CP from ad competition and be able to extract more revenue from it. They also obtain, as we and Kourandi et al (2015) do, that the zero-price rule is not always sufficient to prevent fragmentation.…”

“…This is clearly not the case for the phone in our set-up. Kourandi et al (2015) study the problem of internet fragmentation whereby some applications are only available through a particular ISP because of bilateral exclusivity contracts, and not on the internet as a whole. They build a two ISP-two CP model where there are two forces at play.…”

“…Therefore, ISPs may compete to obtain the exclusivity to offer the app. Exclusivity can be obtained either by paying the rival in exchange for a commitment to block the app or by signing an exclusivity contract with the app developer (as in Kourandi et al (2015)). Since they are always better off under the net neutrality/no-fragmentation equilibrium, this type of exclusivity agreement is always detrimental to consumers but may be good for total welfare if it increases sufficiently profits and does not reduce consumer surplus too much (Proposition 8).…”

Net Neutrality and Inflation of Traffic

“…The paper contributes to the literature on net neutrality (see, e.g., Hermalin and Katz, 2007;Choi and Kim, 2010;Cheng et al, 2011;Grafenhofer, 2011;Economides and Tåg, 2012;Economides and Hermalin, 2012;Bourreau et al, 2015;Kourandi et al , 2015;Jullien and Sand-Zantman, 2015). We borrow from Economides and Hermalin (2012) the notion that delivery speed is related to the ratio of traffic to bandwidth.…”