Network Platform Competition in a Two-Sided Market: Implications to the Net Neutrality Issue

We consider a model for network platform competition between the current “Best Effort” (BE) network and a hypothetical “Next Generation Network” (NGN). We suppose there are indirect network externalities between content providers (CPs) and users of each platform. Moreover, we suppose that NGN users can access BE content, thus there is a cross-platform, indirect network externality. This feature is not symmetric – BE users cannot enjoy NGN content. Both users and content providers are distributed in their relative affinity for each platform type. We find that depending on the strength of the cross-platform network externality, there might either be one stable equilibrium in which CPs and users distribute across both platforms, or there might be 2 stable equilibria corresponding to the market tipping in favor of either NGN or BE. In both cases, we study the pricing power of a monopoly provider of both platforms, and then we study the possible effects of net-neutrality like regulation that constrains the price premium for NGN. We find that for most parameter choice of the model, the monopolist chooses price so that the user population “tips” to all using NGN.