The economics of product-line restrictions with an application to the network neutrality debate

We examine the welfare effects of product-line restrictions, such as those called for by some proponents of network neutrality regulation. We consider a platform that brings together households and application providers. We find that restricting a monopoly platform to a single product has the following effects: (a) application providers that would otherwise have purchased a lowquality variant are excluded from the market; (b) applications “in the middle” of the market utilize a higher and more efficient quality; and (c) applications at the top utilize a lower and less efficient quality than otherwise. Total surplus may rise or fall, although the analysis suggests to us that harm to welfare is likely. We also examine a duopoly model and find that the welfare effects are similar. ∗The authors would like to thank Kathryn Graddy, Yossi Spiegel, John Tirole, John Vickers, two referees, and seminar participants at IDEI and Oxford University. Katz has consulted on telecommunications policy issues for a number of private and governmental clients. None of that consulting concerned network neutrality, and the views expressed in the present paper should not be attributed to any of those organizations.