Welfare Implications of Deviation from Network Neutrality: A Price Discrimination Application

Abstract

This paper investigates how incentives of network operators to deviate from neutrality may create social costs or benefits in different market structures. The deviation from network neutrality is a general form of discrimination based on charging different prices for non-affiliated content and application providers. In this paper, deviation from network neutrality is formulated as a form of vertical foreclosure. While constructing the model two-sided nature of the internet service, the providing market is considered. The author found that, although monopoly network operators have no incentive to deviate from neutrality, the duopoly network operators have this incentive. Welfare analysis suggests destructive results for almost all participants, hence the total surplus in both market structures. In addition, the analysis for the degree of integration between the network operators and their affiliated content and application providers, suggest some policy proposals to discourage their degree of integration.