Nicholas Economides and the Economics of Network Neutrality

By TAP Staff Blogger

Posted on March 4, 2013


The Economics of Network Neutrality, recently published in the RAND Journal of Economics, discusses the private and social benefits of allowing Internet Service Providers (ISPs), such as the telephone or cable companies, to charge content and application providers (e.g. Disney, Google, Microsoft, Netflix) for access to the ISPs’ residential customers.

Network, or “net,” neutrality is the principle that data on the Internet is moved blindly and impartially, without regard to content, destination or source. Currently, people are billed for access to the Internet only by the Internet service provider (ISP) through which they connect to the Internet; pricing is not contingent on the content being transmitted. ISPs have proposed that content and applications providers pay them additional fees for accessing the ISPs’ residential clients, as well as fees to prioritize certain content.

Co-authors Nicholas Economides of New York University’s Stern School of Business, and Benjamin Hermalin of the University of California at Berkeley’s Haas School of Business, analyze the private and social implications of such fees when the network is congested and more traffic implies greater delays. The authors show that, for a wide class of functions, even if networks are congested, it is optimal for society to adopt a network neutrality rule imposing no prioritization and no fees to content/application providers. To illustrate this point: when you allow a certain application/content provider, such as Hulu, access to a fast lane, people are going to use it more, increasing congestion in the fast lane. This diminishes the benefits to society from creating fast lanes.

The authors state that even though society as a whole is better off with network neutrality rules, the residential ISP is better off without them, hence the conflict between telecom and cable providers on one side and the FCC on the other, representing the public.

Professor Nicholas Economides is an internationally recognized academic authority on network economics, electronic commerce and public policy. His fields of specialization and research include the economics of networks, especially of telecommunications, computers, and information, the economics of technical compatibility and standardization, industrial organization, the structure and organization of financial markets and payment systems, antitrust, application of public policy to network industries, strategic analysis of markets and law and economics. Professor Economides is the Executive Director of the Networks, Electronic Commerce and Telecommunications (NET) Institute, a non-profit institution devoted to research on network industries, electronic commerce, telecommunications, the Internet.

Professor Economides discussed this paper in a TAP blog post: The Economics of Network Neutrality (TAP).

The full article is available online: The Economics of Network Neutrality (RAND Journal of Economics).