Regulating Monopolistic ISPs without Neutrality

Abstract

Net neutrality has recently been heavily debated as a potential regulation of the Internet. This debate is centered around the argument whether the Internet Service Providers (ISPs) should be allowed to provide differentiated services over the Internet. Advocates of net neutrality have expressed concerns about the ISPs' pricing power, which might be used to discriminate Content Providers (CPs), and consequently destroy innovations at the edge of the Internet and hurt users' utilities. However, without service differentiation, ISPs do not have incentives to expand infrastructure capacities and provide quality of services, which will eventually impair the development of the future Internet. Although market competition among the ISPs would alleviate the problem and reduce the need for net neutrality regulations, the problem is more severe in monopolistic markets, e.g., rural access markets where natural monopolies exist due to high deployment costs and appropriate regulations are most in need. We study the service differentiation offered by a monopolistic ISP and find that the ISP’s profit-optimal strategy makes a free ordinary service damaged good, which hurts the welfare of CPs and their users. Instead of imposing net neutrality regulations, we propose a more flexible and lenient policy framework that generalizes net neutrality regulations. We believe that by allowing ISPs to differentiate services under a well-designed policy constraint, the utility of the entire Internet ecosystem could be greatly improved.