Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26435
Authors: 
Choi, Jay Pil
Kim, Byung-Cheol
Year of Publication: 
2008
Series/Report no.: 
CESifo working paper 2390
Abstract: 
This paper analyzes the effects of net neutrality regulation on investment incentives for Internet service providers (ISPs) and content providers (CPs), and their implications for social welfare. We show that the ISP's decision on the introduction of discrimination across content depends on a potential trade-off between network access fee and the revenue from the trade of the first-priority. Concerning the ISP's investment incentives, we find that capacity expansion affects the sale price of the priority right under the discriminatory regime. Because the relative merit of the first priority, and thus its value, becomes relatively small for higher capacity levels, the ISP's incentive to invest on capacity under a discriminatory network can be smaller than that under a neutral regime where such rent extraction effects do not exist. Contrary to ISPs' claims that net neutrality regulations would have a chilling effect on their incentive to invest, we cannot dismiss the possibility of the opposite.
Subjects: 
Net neutrality
investment (innovation) incentives
queuing theory
hold-up problem
two-sided markets
vertical integration
JEL: 
D4
L12
L4
L43
L51
L52
Document Type: 
Working Paper

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