Regulating the Open Internet: Past Developments and Emerging Challenges

Zero-Rating and Vertical Content Foreclosure

“…For the high quality CP, however, a lower content price induces increasingly higher demand, in turn, leading to greater profit, and increasing its willingness to pay for full zero-rating. Thus, if content is sufficiently substitutable, i.e., γ > γ Subsidy , 24 the ISP can extract more rent from CP 1 under full zero-rating because CP 1 's willingness to pay for full zero-rating (r F Z 1 ) is large enough. Because, as we will show, the ISP wants full zero-rating for sufficiently large γ, it finds it profitable to pay a subsidy to CP 2 .…”

“…If content is sufficiently substitutable (γ > γ Subsidy ), the ISP must pay a positive subsidy to the low quality CP to attain full zero-rating. 24 γ Subsidy :…”

“…Equation (24) indicates that total surplus is higher under vertical integration when there are no monetary transfers. However, this welfare-enhancing result comes at the expense of unaffiliated CP 2 , which loses market share and profit by having to compete with what customers perceive as a relatively lower cost (higher quality) rival.…”

“…This, in turn will increase the competitive pressures on the CPs, who will respond by lowering their prices. Alternatively, if download limits can be exceeded by paying an overage fee, a positive per-unit fee acts like an excise tax that falls on consumers, but whose incidence is split between consumers and CPs.12 Additionally,Koning and Yankelevich (2018) briefly analyze zero-rating using a standard model of vertically integrated firms who supply their rivals.13 Both the revenue per click and subscription fee are exogenous in the most recent version of the working paper.…”