Band 8, Heft 1 - Network Neutrality

"Network neutrality" encompasses a wide-ranging debate over what limits, if any, should be placed on network providers in pricing or managing Internet traffic. The articles in this volume tackle various aspects of this debate: Have other transportation networks been truly "neutral"? Should broadband providers be allowed to charge content providers for connecting with end users? How much price discrimination is appropriate and is it confined to network operators? How large are the potential costs of constraining traffic management practices? What are the tradeoffs from mandated loop unbundling to deter discrimination and what market power threshold justifies interventions?

The politically-charged notion of network neutrality came to the fore in the first decade of the 21st century, using analogy from transportation as one of the key tools in motivating arguments. This paper examines how the various notions around network neutrality (common carriage, regulation, price discrimination) have historically played out in the transportation sector, and suggests some of the current arguments fail to understand the nuances of how complex networks actually operate to serve the many demands placed on them.

We address whether local ISPs should be allowed to charge content providers, who derive advertising revenue, for the right to access end-users. We compare two-sided pricing where such charges are allowed to one-sided pricing where they are prohibited. By deriving provider equilibrium actions (prices and investments), we determine which regime is welfare-superior as a function of a few key parameters. We find that two-sided pricing is more favorable when the ratio between parameters characterizing advertising rates and end-user price sensitivity is either low or high.

Historical precedents suggest that the basic issues underlying the debate about network neutrality, dealing with the balance between efficiency and fairness in markets, will never be resolved. Should net neutrality dominate, attention would likely turn to other parts of the economy that might be perceived as choke points for economic activities, such as Net search. Traditionally, the balance between efficiency and fairness that was struck by policy makers depended heavily on cost considerations. When a service was expensive to provide, fairness was deemphasized. In the current discussion of network neutrality, this issue appears to be unduly neglected.

An important issue in "network neutrality" is the degree to which networks that comprise the Internet may be "managed" by their operators. This paper examines the current costs of unmanaged/neutral network technology and demonstrates that as customer Internet usage patterns evolve and become both more bandwidth-intensive and real-time oriented, a model of pure neutrality would be extremely expensive for consumers. Unmanaged network capacity sufficient to accommodate expected consumer demand growth currently would result in bills between $143 and $416 per month – depending on the customer’s level of TV viewing. Such fees would likely make unmanaged/neutral Internet service commercially prohibitive.

This paper examines the net neutrality debate in countries outside the U.S., particularly in the EU. Most appear to have endorsed the idea of net neutrality and believe that policies promoting unbundling – mandatory network sharing – will ensure neutral networks. We argue that unbundling may not necessarily affect incumbent incentives to prioritize certain traffic. Because unbundling can affect investment incentives, we use a new dataset to examine empirically the effects of unbundling on investment in new fiber networks in Europe. We find a significant negative correlation between the number of unbundled DSL connections per capita and the number of fiber connections.

Two years ago, disagreement on network neutrality stalled momentum to reform the aging Communications Act. Significantly, both sides of the debate have become hardened, in part because of differing views on the market power of Internet access providers and their ability to foreclose competition. However, neither the FCC nor other government authorities have taken a position on the matter, even in the FCC’s recent network neutrality adjudication. This essay proposes a way forward, by immediately adopting "truth-in-advertising" and "no-blocking" rules and by beginning a comprehensive, rigorous inquiry into the state of the broadband market – starting with the market power question.