Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/114438 
Year of Publication: 
2015
Series/Report no.: 
KOF Working Papers No. 344 [rev.]
Publisher: 
ETH Zurich, KOF Swiss Economic Institute, Zurich
Abstract: 
We investigate the relation between Net Neutrality regulation and Internet fragmentation. We model a two-sided market, where Content Providers (CPs) and consumers interact through Internet Service Providers (ISPs), and CPs sell consumers' attention to advertisers. Under Net Neutrality, a zero-price rule is enforced. In the Unregulated Regime, instead, ISPs make access to their subscribers conditional on payment of a termination fee. Multiple impressions of an ad on the same consumer are partially wasteful. Thus, equilibrium ad rates decrease when audiences overlap. We show that ISPs may strategically set termination fees to induce fragmentation. This takes place when advertising revenues are potentially large but strongly diminished by competition among CPs and when consumer demand is relatively inelastic with respect to content variety. We therefore identify an important link between termination fees, the online advertising market and Internet fragmentation. We extend the model to account for multi-homing consumers, vertically integrated ISPs, third-party advertising platforms and heterogeneous CPs.
Subjects: 
Net Neutrality
two-sided markets
Internet
advertising
fragmentation
JEL: 
L1
D43
L13
L51
Document Type: 
Working Paper

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