September 29, 2009
A Consumer-Welfare Approach to Network Neutrality Regulation of the Internet
Posted by D. Daniel Sokol
Greg Sidak (Criterion Economics) has posted A Consumer-Welfare Approach to Network Neutrality Regulation of the Internet.
ABSTRACT: On Sept. 21, 2009, the Federal Communications Commission announced that it will issue a formal notice of proposed rulemaking to adopt "network neutrality" regulations. “Network neutrality” is the shorthand for a proposed regime of economic regulation for the Internet. Because of the trend to deliver traditional telecommunications services, as well as new forms of content and applications, by Internet protocol (IP), a regime of network neutrality regulation would displace or subordinate a substantial portion of existing telecommunications regulation. If the United States adopts network neutrality regulation, other industrialized nations probably will soon follow. As a result of their investment to create next-generation broadband networks, network operators have the ability to innovate inside the network by offering both senders and receivers of information greater bandwidth and prioritization of delivery.
Network neutrality regulation would, among other things, prevent providers of broadband Internet access service (such as digital subscriber line (DSL) or cable modem service) from offering a guaranteed, expedited delivery speed in return for the payment of a fee. The practical effect of banning such differential pricing (called “access tiering” by its critics) would be to prevent the pricing of access to content or applications providers according to priority of delivery. To the extent that an advertiser of a good or service would be willing to contract with a network operator for advertising space on the network operator’s affiliated content, another practical effect of network neutrality regulation would be to erect a barrier to vertical integration of network operators into advertising-based business models that could supplement or replace revenues earned from their existing usage-based business models. Moreover, by making end-users pay for the full cost of broadband access, network neutrality regulation would deny broadband access to the large number of consumers who would not be able to afford, or who would not have a willingness to pay for, what would otherwise be less expensive access.
Proponents of network neutrality regulation argue that such restrictions on the pricing policies of network operators are necessary to preserve innovation on the edges of the network, as opposed to innovation within the network. However, recognizing that network congestion and real-time applications demand some differential pricing according to bandwidth or priority, proponents of network neutrality regulation would allow broadband Internet access providers to charge higher prices to end-users (but not content or applications providers) who consume more bandwidth or who seek priority delivery of certain traffic.
Thus, the debate over network neutrality is essentially a debate over how best to finance the construction and maintenance of a broadband network in a two-sided market in which senders and receivers have additive demand for the delivery of a given piece of information—and hence additive willingness to pay. Well-established tools of Ramsey pricing from regulatory economics can shed light on whether network congestion and recovery of sunk investment in infrastructure are best addressed by charging providers of content and applications, broadband users, or both for expedited delivery.
Apart from this pricing problem, an analytically simpler component of proposed network neutrality regulation would prohibit a network operator from denying its users access to certain websites and Internet applications, such as voice over Internet protocol (VoIP). Although some instances of blocking of VoIP have been reported, such conduct is not a serious risk to competition. To address this concern, I analyze whether market forces (that is, competition among access providers) and existing regulatory structures are sufficient to protect broadband users. I conclude that economic welfare would be maximized by allowing access providers to differentiate services providers of content and applications in value-enhancing ways and by relying on existing legal regimes to protect consumers against the exercise of mark! et power, should it exist.
September 27, 2009
Yom Kippur and Antitrust
Posted by D. Daniel Sokol
Sundown tonight begins Yom Kippur, the holiest day of the year in the Jewish religion. I will not be blogging till tomorrow night as I spend this solemn 24 hour period fasting, repenting and atoning for my sins. WARNING: This is one of the rare posts in which I do not have an antitrust or larger competition spin on a a posting. Maybe one of my co-bloggers will post something on an antitrust topic.
As I think about deep issues and reflect back upon the past year, I try to explain to my daughters how we have a commitment to making the world a better place. For us, this is a biblical calling. To be sure, there are many important Jewish contributions to the world- with Nobel prize season upon us, I note that the 12 million Jews of the world have produced nearly a quarter of all Nobel Prize winners. However, I want to focus on the contribution to making the world a better place by one of my personal Jewish heroes - comedian Mel Brooks. Mel has made me laugh very hard with his 2000 Year Old Man skit, and with movies Blazing Saddles, Young Frankenstein and The Producers. Robin Hood Men in Tights was not funny and so I pretend it does not exist, much the way Godfather Part III and Star Wars Episodes I, II, and III do not exist. In this video clip Brooks explains why he is proud to be a Jew. I found a passage from a book in which Brooks provides us with how his Jewish heritage impacted his comedy:
Look at Jewish history. Unrelieved, lamenting would be intolerable. So, for every 10 Jews beating their breasts, God designated one to be crazy and amuse the breast-beaters. By the time I was five I knew I was that one.... You want to know where my comedy comes from? It comes from not being kissed by a girl until you're 16. It comes from the feeling that, as a Jew and as a person, you don't fit into the mainstream of American society. It comes from the realization that even though you're better and smarter, you'll never belong.
American-Jewish Filmmakers: Traditions and Trends (University of Illinois Press)
Have an easy fast and Gmar Chatima Tova.