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The Economics of Net Neutrality Revisited

Author

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  • Gernot Pehnelt

    (Director of GlobEcon, Research Associate at ECIPE and Research Partner at the Chair of Economic Policy, Friedrich-Schiller-University Jena)

Abstract

In this paper, we analyze the problem of congestion and quality loss of data transmission through the Internet from an economic perspective. We show that due to the congestion problem, quality sensitive services are likely to be crowded out by high volume but less quality sensitive applications in a strict "neutral" system. This crowding out reduces the availability of services and the development and diffusion of innovative and high value services. Not least, the congestion problem causes welfare loss. As we discuss in this paper, the differentiation of data packets according to their quality sensitivity could remedy the congestion problem. Appropriate business models that incorporate quality of service concepts could be very efficient in preventing the crowding out of high value quality sensitive services without affecting other applications and would be very convenient for Internet users at the same time. We show that any ex ante regulation in the sense of strict Net neutrality could seriously harm the development of innovative business models and discourage innovation and investment.

Suggested Citation

  • Gernot Pehnelt, 2008. "The Economics of Net Neutrality Revisited," Jena Economics Research Papers 2008-080, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2008-080
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    File URL: https://oweb.b67.uni-jena.de/Papers/jerp2008/wp_2008_080.pdf
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    More about this item

    Keywords

    Net neutrality; Internet; bandwidth; quality sensitivity; crowding-out;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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