Towards an Economic Framework for Network Neutrality Regulation

A. STYLIZED MODEL........................................................................................................................................... 3 B. NETWORK PROVIDER IS MONOPOLIST IN THE MARKET FOR INTERNET SERVICES .......................................... 5 1. No General Incentive to Discriminate ....................................................................................................... 5 2. New Exceptions ......................................................................................................................................... 6 2.1. Complementary Product Source of Outside Revenue.......................................................................................... 6 2.2. Monopolist’s Complementary Product Source of Outside Revenue.................................................................... 8 2.3. Monopoly Preservation in the Complementary Market....................................................................................... 9 3. Relevance of Known Exceptions.............................................................................................................. 13 3.1. Primary Good not Essential ............................................................................................................................... 14 3.2. Monopoly Preservation in the Primary Market.................................................................................................. 16 4. Profitability of Discrimination without Monopolization ......................................................................... 22 4.1. More Sales at Market Prices .............................................................................................................................. 23 4.2. More Outside Revenue ...................................................................................................................................... 24 4.3. Monopoly Preservation in the Complementary Market..................................................................................... 25 C. NETWORK PROVIDER FACES COMPETITION IN THE MARKET FOR INTERNET SERVICES................................ 25 1. Ability to Exclude .................................................................................................................................... 27 2. Benefits of Exclusion ............................................................................................................................... 27 2.1. More Sales at Market Prices .............................................................................................................................. 28 2.2. More Outside Revenue ...................................................................................................................................... 28 2.3. Monopoly Preservation in the Complementary Market..................................................................................... 29 2.4. Preserving Competitive Position in the Primary Market ................................................................................... 29 3. Costs of Exclusion ................................................................................................................................... 30 D. CONCLUSION ................................................................................................................................................ 31