Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality

Networks, the Internet, and Cloud Computing, Networks and Infrastructure and Net Neutrality

Article Snapshot

Author(s)

Robin S. Lee and Tim Wu

Source

Journal of Economic Perspectives, Vol. 23, No. 3, pp. 61-76, Summer 2009.

Summary

This paper asks if regulation is needed to keep prices to access content online from changing.

Policy Relevance

There is no guarantee the ISPs will avoid charging too much to access online content, and regulation might help.

Main Points

  • Internet Service Providers (ISPs) might charge either consumers or content providers like Google “termination fees” for letting consumers access online sites, but, so far, they do not.
    • Usually, ISPs charge consumers and content providers flat rate “access fees” or “usage fees,” fees that vary if more time or bandwidth is used.

  • This price structure encourages the development of many creative applications. Those who develop applications know that everyone online will be able to reach their service.

  • Like canals and railroads, the Internet is in a sense a public service.

  • The Internet is a two-sided market, meaning that it serves two groups of users, consumers, and content providers.
    • In these it can make sense for one group of users to pay more to subsidize the other group, so that the other group grows large.
    • Both groups benefit when there are many users in both groups (“network effects”).

  • Allowing termination fees to be charged could fragment the Internet. Only those who had negotiated a fee would reach their audience. Some carriers might connect only some content.

  • ISPs have not yet tried to change their fee structure, but some might try to do so in the future, because ISPs’ pricing decisions do not take into account the full public value of the Internet, but only their own portion of it.

  • Regulation or the threat of regulation might help maintain the current price structure. However, there are many unknowns.

  • Termination fees would make users and content providers pay twice for service.

  • Allowing ISPs to charge more will not necessarily attract more investment.

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