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Wednesday, 16 April 2014

Net neutrality

A number of academic papers have explored the issue of net neutrality in the last few years, many of the most state-of-the-art work being published as we speak. There are two particular papers that are noteworthy in this space. One is by Economides and Hermalin, which has appeared in RAND recently (2012) and the other is by Njoroge in Review of Network Economics. Both of these papers look at a fairly complex world with competing network providers, multiple regimes and heterogeneous consumers and content providers. The results are complicated and it is hard to provide clear cut recommendations. In a nutshell, a non-neutral regime allows network providers to extract more surplus from users and content providers, which also increases their incentives to invest in a higher quality network. Higher quality networks may also provide investment incentives to some content providers but may actually deter some others from participating altogether. So when the content providers are very heterogeneous, net neutrality might provide more overall welfare. It is also important to see that a key driver of the results is the amount of surplus that network providers can keep from the ecosystem. This may not only depend on the pricing regime but also on how much external competition they face. In other words, competition at the network level coupled with a liberal (i.e. not neutral) regulatory regime might actually provide a flexible and robust industry. What is clear from the academic research is that a regulator faces an extremely complex problem if it has to decide on net neutrality or even a restricted framework allowing some discrimination.

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