The Economics of Network Neutrality

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

Article Snapshot

Author(s)

Nicholas Economides and Benjamin E. Hermalin

Source

The RAND Journal of Economics, Vol. 43, No. 4, pp. 602-629, Winter 2012

Summary

This article evaluates the economic value of network neutrality and alternatives when networks are congested.

Policy Relevance

Under some technical conditions, network neutrality is economically preferable to alternative pricing systems.

Main Points

  • Under network neutrality, Internet service providers (ISPs) charge the same rate to all firms for every type of data, and move packets at uniform speeds.
    • If the network is congested, and more traffic leads to ever-greater delays, fees for traffic prioritization (“tiering”) might be justifiable.
       
  • If ISPs do not generate significant content for consumers, several predictions can be made about network neutrality and tiering.
    • It will never be economically efficient to exclude some content providers from a network.
       
    • The degree to which fees charged to firms will be economically desirable will be the degree to which these fees permit the flow of content to consumers.
       
    • In order for tiering to be economically desirable, content whose value increases more quickly as its transmission time drops must be prioritized. This is not the same as requiring that the most time-sensitive data be prioritized.
       
  • A tiering scheme that is inefficient in the short run will increase bandwidth in the longer term as ISPs see a relatively greater opportunity for future profits and increase investments, but this may not outweigh the short-term costs of content loss.
     

 

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