Big Winners and Small Losers of Zero-rating

Abstract

An objective of network neutrality is to design regulations for the Internet and ensure that it remains a public, open platform where innovations can thrive. While there is broad agreement that preserving the content quality of service falls under the purview of net neutrality, the role of differential pricing, especially the practice of zero-rating, remains controversial. Zero-rating refers to the practice of providing free Internet access to some users under certain conditions, which usually concurs with differentiation among users or content providers. Even though some countries (India, Canada) have banned zero-rating, others have either taken no stance or explicitly allowed it (South Africa, Kenya, U.S.). In this article, we model zero-rating between Internet service providers and content providers (CPs) to better understand the conditions under which offering zero-rating is preferred, and who gains in utility. We develop a formulation in which providers’ incomes vary, from low-income startups to high-income incumbents, where their decisions to zero-rate are a variation of the traditional prisoner’s dilemma game. We find that if zero-rating is permitted, low-income CPs often lose utility, whereas high-income CPs often gain utility. We also study the competitiveness of the CP markets via the Herfindahl Index. Our findings suggest that in most cases the introduction of zero-rating reduces competitiveness.