Wednesday, March 19, 2014
Nicholas Economides, New York University - Leonard N. Stern School of Business - Department of Economics and Benjamin E. Hermalin, University of California, Berkeley The Strategic Use of Download Limits by a Monopoly Platform.
ABSTRACT: We consider a heretofore unexplored explanation for why platforms, such as Internet service providers, might impose download limits on content consumers: doing so increases the degree to which those consumers view content providers’ products as substitutes. This, in turn, intensifies competition among providers, generating greater surplus for consumers. A platform, in turn, can capture this increased surplus by charging consumers higher access fees. Even accounting for congestion externalities, we show that a platform will tend to set the download limit at a lower level than would be welfare-maximizing; indeed, in some instances, so low that no download limit is welfare superior to the limit the platform would set. Somewhat paradoxically, we show that a platform will install more bandwidth when allowed to impose a download limit than when prevented from doing so. Other related phenomena are explored.