Balancing Openness and Prioritization in a Two-Tier Internet

The open internet is plagued by congestion that restricts the development of sophisticated internet-based services, as was predicted in early work on priority pricing. Broadband and edge providers have proposed a two-tier internet with fee-based prioritization of traffic in a fast-lane internet that coexists with the open internet to overcome these problems. Doing so restricts internet openness, also known as network neutrality, in the fast-lane internet. Opponents of a two-tier internet believe it would hinder innovation, motivate underinvestment in internet infrastructure, and, consequently, reduce the quality of service (QoS) of the open internet. The challenge is for policy to balance a fee-based fast lane for priority traffic and safeguard against the viability of the open internet. In our model, edge providers choose output levels and internet type; a broadband provider chooses investment in internet capacity and pricing for prioritizing traffic in the fast lane; and a policy maker chooses a mechanism for balancing openness and prioritization in a two-tier internet. We find that edge providers with greater bandwidth requirements per unit of output convert to the fast lane, which can drive innovation from edge providers with high bandwidth requirements. The broadband provider chooses fixed fee pricing for the fast lane but has no incentive to increase investment in internet capacity as long as the open internet is not monetized. So long as there are no investments in internet capacity, all edge providers of the open internet and their end users are worse off with a two-tier internet. To maintain the QoS of the open internet and to increase social welfare, a two-tier internet has to be coupled with a policy mechanism, whereby a portion of broadband provider profit is invested in internet capacity.