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Sunday, September 29 • 9:00am - 9:35am
Net Neutrality, Network Investment and Content Quality

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The increasing development of the Internet network gave rise to a huge regulatory debate over the past few years. The most important issue is certainly on the neutrality of the Internet and how its impacts on the incentives for network operators and content providers to invest - both in network infrastructures and quality of services. The debate over net neutrality raises many questions about how relationships between network operators and content providers should be organized, mainly in terms of pricing and quality of access to broadband transmission services (Schuett (2010) gives a recent overview of these issues). One of the main questions is the condition under which regulators should allow network operators to adopt traffic management practices to avoid congestion and ensure sufficient quality of service to content providers for offering their services. Recently, in September 2011, the FCC released the final net neutrality rules for preserving an open Internet and stressed the need for transparency in network management practices and reasonable discrimination in transmitting network traffic. In Europe, the Commission is due to give its recommendations to ensure an open Internet in late 2012.

In Europe, related to the debate on the net neutrality the regulatory debate focuses on the investment in Next Generation Networks (NGNs). The question is how to give incentive to the network operators to invest in new communication infrastructures and then to migrate from the copper network (the old technology) to the fiber network (the new technology). Economic literature focused on this topic has mainly analyzed the impact of the access pricing rules on the incentives of operators to roll-out new infrastructures. How to manage the coexistence of the old and the new technologies is certainly the main issue for National Regulatory Authorities (NRAs). The interplay between investment and access price has already been studied in the economics literature, for instance, by Brito, Pereira and Vareda (2010), Vareda & Hoernig (2010) and more recently by Bourreau, Cambini and Dogan (2011) and Bourreau, Cambini and Hoernig (2012) in models that introduced directly the issue of the technological migration and the balancing effects of the network access price on the incentives to invest in the new technology.

Contributions closest to ours have been those that have modeled the key impact of network neutrality on the investment of the network operators. The first rigorous theoretical analysis of net neutrality can be found in Economides and Tag (2007) . Using a two-sided framework, this paper analyzes a model where network operators can charge content providers for traffic termination to consumers. They show that net neutrality, viewed as a no access fees regime, can greatly improve the consumer surplus but they do not consider investment by network operators nor innovation by content providers.

Economides and Hermalin (2012) assume a limited bandwidth allocated between content providers and look at the ISP's incentive to invest in more bandwidth. Cheng et al. (2011), Choi and Kim (2010), and Kramer and Wiewiorra (2012) study a model of queuing theory to model congestion on the Internet. They show that priority pricing can be welfare enhancing in the short-run and can increase the ISP's incentive to invest in network infrastructure. Recently, Reggiani and Valletti (2012) explicitly introduce a dynamic model with a large content provider competing with providers on the fringe. Bourreau et al. (2011) model competition between ISPs and study investment decisions in network capacity. While all these contributions give interesting insights into the impact of net neutrality on network operators and content providers behaviors, none of these papers explicitly analyze the interplay between the investment decision of the network operators and content quality offered by content providers. Yet, there exists a strong relationship between both that should be taking into account when analyzing the potential impacts of net neutrality on infrastructure investment of network operators.

The aim of this paper is to contribute to the question of investment in the NGNs by focusing on the interplay between infrastructure investment from the network operators and the quality of content, and examine the potential impact of the discriminatory regime. Usually, Internet broadband is viewed as two-sided market consisting of consumers on one side and content providers on the other. The interplay between both sides includes the way prices are set. However, the consumers? willingness to pay to access the network depends, not only on the number of content providers, but also on the quality of contents offered. On the other hand, incentives network operators to invest crucially depend on how they can price the access to the new technology on both sides of the platform. As consumer willingness to pay is usually an increasing function of the quality of content, the network operator's incentive to invest should be potentially even stronger when the quality of content is high. That is certainly a part of the mechanisms that can increase the incentive to invest in a new technology for the network operator. The reverse is certainly true, and the incentive to upgrade the quality of content for the content providers should be also increasing with the quality of the network infrastructure.

The setting of the model is the following. We assume that a network operator provides access to consumers and content providers. The network operator offers two access technologies, an old technology (copper) and a new technology (NGN). Content providers sell both a basic content and a premium content depending on the network technology consumers subscribe. We consider two market segments: one in which the network operator only offers the old technology (copper), and the other in which both technologies are offered. The network operator can invest to increase its market coverage with the new technology. We show that a marginal network investment can be beneficial for content providers and increase the consumer surplus, and examine the impacts of the discriminatory regime. We also state that content quality produces contrasted effects in the investment from the network operator depending on how high the consumer valuation for premium content is compared to basic content and the substitutability between both technologies. Finally, high content quality can give incentives to the network operator to invest more in the new technology, and then create a greater positive effect of the discriminatory regime.

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Sunday September 29, 2013 9:00am - 9:35am
GMUSL Room 120

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