Thursday, February 6, 2014

Nicholas Economides, Stern School of Business, NYU; Haas School of Business, UC Berkeley and Benjamin Hermalin, Dept. of Economics & Haas School of Business, UC Berkeley analyze 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 the 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 welfaremaximizing; 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.

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