Paid Prioritization and Its Impact on Net Neutrality

Abstract

The net neutrality debate has been centered on the question: should Internet service providers (ISPs) be allowed to differentiate services for Internet content traffic? The concern is that the differentiation imposed by selfish ISPs might discriminate content providers (CPs) and harm social welfare. Although market competition among ISPs would alleviate the problem and moderate the necessity for net neutrality regulations, the problem remains in monopolistic access markets. We focus on such a market and study paid prioritization where CPs voluntarily pay for prioritizing their traffic under shared capacity. We study an ISP’s pricing strategy, CPs' choices of priority, and the resulting system equilibrium, based on which we derive the utility of the ISP and CPs as well as social welfare. This paper shows that: 1) an ISP’s optimal pricing leads to an efficient differentiation among CPs, such that social welfare is close to its maximum; 2) although ISPs might inhibit capacity deployment in the short run, price regulation could solve this issue; and 3) under medium system scale and capacity cost, ISPs would have strong incentives to expand capacity under paid prioritization. From a welfare perspective, our results suggest that paid prioritization could be superior to the imposition of net neutrality regulations.