Net neutrality in oligopolistic models of content provision and internet service provision markets

Abstract

Importance of telecommunications in all societies and all industries is growing tremendously. From entertainment to even the most basic needs such as ordering potable water right at our doorsteps, we rely on the telecommunication networks to provide us the means. Behind the scenes there is a complex mesh of advanced technology with an evolving market interaction of Content Providers (CPs) and Internet Service Providers (ISPs) racing to profit from the end-users (EUs). National Telecommunications Regulatory Authorities (NTRA) in each country regulate the market to maximize the total welfare. Net Neutrality (NN) is the mechanism that is implemented and safeguarded by the NTRAs that protects against discrimination of data. As a principle, NN advocates that all data has been created equal and shall not be throttled, discarded, de-prioritized or charged differently than any other data. Furthermore, NN prevents ISPs asking for termination fees from CPs to give them access to the EUs. Content Providers (CPs) seem to be generally pro-NN and ISPs seem to be against NN, likely because of the relative inelasticity of end-user demand for ISPs compared to CPs, which is reflected in the joint demand structure as I model in this dissertation. Latest academic articles have focused on the successive monopoly or successive oligopoly models in vertically related markets to explain the dynamics of the CP, ISP and end-user interaction. In these models, upstream is the CP (e.g., Netflix, BluTV), downstream is the ISP (e.g., Comcast, TTNet). In early models, CPs and ISPs are assumed to be perfect complements. Therefore, the termination fee that the CP pays to the ISP becomes irrelevant, and hence does not impact the prices to the end-user or the total welfare. This result is not consistent with what we observe in the industry, like the case between South Korea Broadband and Netflix (Bae et al., 2021). Indeed, there is mounting pressure from ISPs to allow these payments, which means these fees are not irrelevant. My conclusion is that the perfect complementarity assumption is inappropriate to explain the industry. In my model, I introduce imperfect complementarity, which releases the constraint that the quantity of CP demanded, and the quantity ISP demanded to be equal, and I show that introducing a non-zero termination fee may indeed increase total welfare. Therefore, we recommend NTRAs to consider termination fee as a leverage to maximize the social welfare within each country. Furthermore, I show that the need for net neutrality depends on the level of complementarity and own price effects of the ISP and the CP relative to each other.