Essays on the economic effects of Net Neutrality regulation
Gee, Evan J.D.
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The questions of whether and how to regulate the Internet have been a topic of serious political discussion for some time now. In many ways the discussion is actually much older than the Internet itself, as the situation at hand has strong parallels to both the telegraph and the telephone. The question of Net Neutrality is one small part of that discussion. Net Neutrality is, in essence, a broad principle that says Internet Service Providers (ISPs) should not alter the quality of service based on the origin or type of traffic. In chapters 2 and 3 I examine the economic effect of possible Net Neutrality regulations in a number of different markets. Since an enormous number of Internet based businesses rely on either direct sales or a subscription model, chapter 1 focuses on businesses with a direct financial connection between content providers and consumers. I show that while priority service can increase efficiency, if the Internet Service Provider can charge for priority it has a strong incentive to distort the content providers' market and little incentive to increase infrastructure investment. Chapter 3 takes a similar approach but instead looks at markets where businesses are primarily funded through advertisement. This model reaches similar conclusions: there are strong possible efficiency gains from prioritizing some kinds of traffic, but no policy is likely to have a strong effect on investment and the dangers of upstream market distortion are considerable. As a result, both chapters suggest the optimal regulatory policy is one that allows prioritizing types of traffic without allowing the ISP to pick winners among the content providers. Chapters 2 and 3 make it clear that the effects of Net Neutrality regulation are directly tied to the monopoly status of the Internet Service Providers, so in Chapter 4 I examine the market structure in detail to better understand why the market is still so heavily concentrated. Capital constraints are clearly part of the issue, but distortions caused by bundling and local regulations appear to play a large role.