Zero-Rating and Vertical Content Foreclosure

Abstract

We study zero-rating, a practice whereby an Internet service provider (ISP) that limits retail data consumption exempts certain content from that limit. This practice is particularly controversial when an ISP zero-rates its own vertically integrated content, because the data limit and ensuing overage charges impose an additional cost on rival content. We find that zero-rating and vertical integration are complementary in improving social welfare, though potentially at the expense of lower profit to an unaffiliated content provider. Moreover, allowing content providers to pay for zero-rating via a sponsored data plan raises welfare by inducing the ISP to zero-rate more content.

Effects of vertical integration on internet service providers’ zero-rating choice

“…Vyavahare and Manjunath (2018) studies zero-rating in the presence of competition between ISPs. Jeitschko et al (2020) is the closest in spirit to our paper; they investigate the relationship between the ISP's vertical integration and zero-rating practice. Jeitschko et al (2020), as well as the present paper, analyze the situation where an ISP intermediates the transactions between consumers and two CPs.…”

“…Jeitschko et al (2020) is the closest in spirit to our paper; they investigate the relationship between the ISP's vertical integration and zero-rating practice. Jeitschko et al (2020), as well as the present paper, analyze the situation where an ISP intermediates the transactions between consumers and two CPs. They show that vertical integration is welfare-enhancing; however, it is detrimental to the unaffiliated CP.…”

Zero-rating, content quality, and network capacity

“…Zero rating is found to be welfare enhancing and to cause network capacity expansion. Jeitschko et al (2019) consider the implications of zero rating with a vertically integrated ISP and asymmetric CPs with respect to some given quality parameter. Schnurr and Wiewiorra (2018), who analyze two groups of consumers who are distinguished by their valuation of the content, find that when consumer groups are heterogeneous in their valuation of zero-rated content, they benefit from this practice.…”

“…See, for instance,Gautier and Somogyi (2020),Jeitschko et al (2019) orJullien and Sand-Zantman (2018).8 We consider a strict application of net neutrality rules that forbids the ISP from charging a linear access price, either to CPs to obtain access to the network or to consumers for any data consumed in excess of their initial allowance. We do not consider other forms of discrimination, such as paid-prioritization contracts.9 For example, Netflix generates revenues exclusively from user subscriptions, social media websites such as Facebook and Instagram rely largely on advertising revenue, and streaming media services such as YouTube and Spotify, as well as many other online applications, use a "freemium" model where revenue is generated from advertising displayed to consumers using the service for free while paying consumers have access to advertising-free content.…”

Zero-Rating and Net Neutrality: Who Wins, Who Loses?

“…Some previous studies focus on abolishing net neutrality under zero-rating. For instance, the authors in [30], [31], [32] analyze zero-rating incentives of a monopolistic ISP in a homogeneous market of customers, and how different zero-rating equilibria impacts social welfare. Somogyi et al [30] consider capacity constraints in a two-sided market with advertising revenue for CPs.…”