On the Net Neutrality Efficiency under Congestion Price Discrimination

In this paper, we study the extent to which net neutrality, defined as price non-discrimination, is welfare improving in comparison to non-net-neutrality. We consider a two-sided congested internet service provider (ISP) that acts as a monopoly platform. The congestion is basically caused by the overuse of the fixed ISP’s bandwidth by content providers. Unlike end-users, we allow content providers to be heterogeneous in their sensitivity to congestion. The analysis reveals that the ISP monopolist, by departing from the net neutrality regime, price-favors the most congestion sensitive providers. We argue that these providers play a crucial role in creating traffic and generating profit for the ISP platform. In our paper, whether net neutrality improves or harms social welfare depends on a critical threshold of the platform equilibrium congestion level. This threshold is an indicator or a proxy that indicates for a planner whether or not net neutrality rules should be repealed. When the platform congestion level lies below the threshold, we show that non-net-neutrality makes the society better-off. Exceeding the threshold, two effects are identified: profit-increase effect and consumers’ surplus-reduction effect. If the latter outweighs the former, net neutrality increases social welfare when compared to non-net-neutrality.