Two-sided perspectives on net neutrality                              Robin Mason                         Athens, January ...
Net neutrality in an economist’s language              No “priority lanes”: restriction of product line              ISPs ...
What are two-sided markets?              Externalities between two sides of market              Platform interacts with bo...
ISPs as platforms              Cont Provs                 ISP                          ConsumersRobin Mason               ...
Two-sided view of net neutrality              ISP matches content providers to consumers              Net neutrality asser...
A simple model              Two sides (1, 2) and a platform              Platform charges both sides; no other payments (e...
Linear demand              α1 n2                p1                      n1 = α1 n2 − p1Robin Mason                        ...
Efficient and prof-max outcomes                       ∗                      p1 = f1 − α2 n2 ;                       π      ...
Net neutrality: p1 = 0                                                      α1 f1 + f2                       p1 = 0,      ...
Symmetric case: f1 = f2 = f                                      π                         π                              ...
Conclusions              Have looked at 1 aspect of net neutrality: ISP cannot charge              content providers      ...
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2nd SESERV workshop - Net Neutrality Economic Model - Robin Mason

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There continues to be heated debate about network neutrality: what it means, why it is important, what effect the policy has. In this talk, I will discuss how economic models of two-sided markets (or platforms) can help to shed light on these questions.

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2nd SESERV workshop - Net Neutrality Economic Model - Robin Mason

  1. 1. Two-sided perspectives on net neutrality Robin Mason Athens, January 2012Robin Mason Two-sided perspectives on net neutrality 1/11
  2. 2. Net neutrality in an economist’s language No “priority lanes”: restriction of product line ISPs cannot be content providers: restriction on vertical integration Network providers cannot charge content providers: restriction on pricingRobin Mason Two-sided perspectives on net neutrality 2/11
  3. 3. What are two-sided markets? Externalities between two sides of market Platform interacts with both sides Non-neutrality: relative prices matter “A market is two-sided if the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other by an equal amount; in other words, the price structure matters and platforms must design it so as to bring both sides on board.” (Rochet and Tirole) Examples: creedit cards; games consoles; dating agencies; e-market places; newspapersRobin Mason Two-sided perspectives on net neutrality 3/11
  4. 4. ISPs as platforms Cont Provs ISP ConsumersRobin Mason Two-sided perspectives on net neutrality 4/11
  5. 5. Two-sided view of net neutrality ISP matches content providers to consumers Net neutrality asserts that ISP cannot charge content provider ... . . . and can only charge end-users in a particular way I.e., imposing a certain structure on two-sided pricing Net effect not obvious: lower price to one side ⇒ higher price to other cet. par., membership of one side grows (declines) but network effects mean that utility declines (grows) Need a model to resolveRobin Mason Two-sided perspectives on net neutrality 5/11
  6. 6. A simple model Two sides (1, 2) and a platform Platform charges both sides; no other payments (e.g., from consumers to content providers) Costs per member f1 , f2 u1 (x) = α1 n2 − p1 − x, x ∼ U[0, x ] ¯ Hence n1 = α1 n2 − p1 1 2 1 2 W = n1 + n + n1 (p1 − f1 ) + n2 (p2 − f2 ) 2 2 2 1 2 1 2 = n1 + n + n1 (α1 n2 − n1 − f1 ) + n2 (α2 n1 − n2 − f2 ) 2 2 2Robin Mason Two-sided perspectives on net neutrality 6/11
  7. 7. Linear demand α1 n2 p1 n1 = α1 n2 − p1Robin Mason Two-sided perspectives on net neutrality 7/11
  8. 8. Efficient and prof-max outcomes ∗ p1 = f1 − α2 n2 ; π p1 = f1 − α2 n2 + n1 . ∗ f1 + Af2 ∗ Af1 + f2 n1 = ; n2 = . A2 − 1 A2 − 1 π 2f1 + Af2 π Af1 + 2f2 n1 = , n2 = . A2 − 4 A2 − 4Robin Mason Two-sided perspectives on net neutrality 8/11
  9. 9. Net neutrality: p1 = 0 α1 f1 + f2 p1 = 0, ˆ p2 = ˆ . 2 α1 (α1 f1 + f2 ) α1 f1 + f2 n1 = ˆ , n2 = ˆ . 2(α1 α2 − 1) 2(α1 α2 − 1)Robin Mason Two-sided perspectives on net neutrality 9/11
  10. 10. Symmetric case: f1 = f2 = f π π p1 < p1 , ˆ p2 > p2 . ˆ π n1 > n1 , ˆ π n2 ˆ n2 as α1 α2 π If α1 = α2 , effects perfectly offset, and n2 = n2 ! ˆRobin Mason Two-sided perspectives on net neutrality 10/11
  11. 11. Conclusions Have looked at 1 aspect of net neutrality: ISP cannot charge content providers At least in one case content providers definitely benefit consumers may benefit, depending on relative network effects platform’s profits decrease, of course Have left out a lot of issues priority lanes incentives for platform to invest other sources of revenues for content providers competition between ISPs But even in this simple setting, effect of net neutrality is subtle Analysis not ideologyRobin Mason Two-sided perspectives on net neutrality 11/11

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