Is Non-Neutrality Profitable for the Stakeholders of the Internet Market?

We consider a system in which there exists two ISPs, one “big” Content Provider (CP), and a continuum of End-Users (EUs). One of the ISPs is neutral and the other is non-neutral. We consider that the CP can differentiate between ISPs by controlling the quality of the content she is offering on each one. We also consider that EUs have different levels of innate preferences for ISPs. We formulate a sequential game, and explicitly characterize all the possible Sub-game Perfect Nash Equilibria (SPNE) of the game. We prove that if an SPNE exists, it would be one of the five possible strategies each of which we explicitly characterize. We prove that when EUs have sufficiently low innate preferences for ISPs, a unique SPNE exists in which the neutral ISP would be driven out of the market. We also prove that when these preferences are sufficiently high, there exists a unique SPNE with a non-neutral outcome in which both ISPs are active. Numerical results reveal that the neutral ISP receives a lower payoff and the non-neutral ISP receives a higher payoff (most of the time) in a non-neutral scenario. However, we identify scenarios in which the non-neutral ISP loses payoff by adopting non-neutrality. We also show that a non-neutral regime yields a higher welfare for EUs in comparison to a neutral one if the market power of the non-neutral ISP is small, the sensitivity of EUs (respectively, the CP) to the quality is low (respectively, high), or a combinations of these factors.