Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102979
Authors: 
D'Annunzio, Anna
Russo, Antonio
Year of Publication: 
2013
Series/Report no.: 
KOF Working Papers, KOF Swiss Economic Institute, ETH Zurich 344
Abstract: 
We investigate the implications of Network Neutrality regulation for 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 Network Neutrality, CPs can have their traffic delivered to consumers by ISPs for free, while in the Unregulated Regime they have to pay a (non-discriminatory) termination fee. In our model multiple impressions of an ad on a consumer are partially wasteful. Thus, equilibrium ad rates decrease when the audiences of CPs overlap. We show that universal distribution of content is always an equilibrium when Network Neutrality regulation is in place. In contrast, when competition among CPs strongly reduces their profits, in the Unregulated Regime ISPs can use termination fees to induce fragmentation and extract CPs' extra profits. This occurs when repeated impressions of an ad rapidly lose value and consumers care for content availability to a relatively small extent. Our results suggest that the Unregulated Regime is never superior to Network Neutrality from a consumer surplus and social welfare point of view.
Subjects: 
Network Neutrality
two-sided markets
Internet
advertising
fragmentation
JEL: 
L1
D43
L13
L51
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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