InvestmentinTwoSidedMarketsand theNetNeutralityDebate - - PowerPoint PPT Presentation

Investment
in
Two
Sided
Markets
and 
 the
Net
Neutrality
Debate

Nicolas
S;er‐Moses 
 Columbia
Business
School

Joint
work
with

 Paul
Njoroge,
Asuman
Ozdaglar
 MIT
 Gabriel
Weintraub
 Columbia
Business
School


Modélisa;on
en
Economie
des
réseaux
et
NEUtRalité
du
Net
 Kick‐off
Mee;ng,
May
26‐27
2011,
INRIA
Paris


The
Net
Neutrality
Debate


• Net
neutrality:
Internet
Service
Providers
(ISPs)
cannot
exercise


discrimina;on
against
content.


• All
bits
should
be
treated
equal;

no
“priority
lanes”.

• ISPs
should
not
ver;cally
integrate
into
content
provisioning.

• Network
providers
should
not
be
allowed
to
charge
off‐network


content
providers
(CPs)
for
consumer
access.


• Generated
heated
public
debate
in
US
and
in
Europe.


Net
Neutrality
Advocates


Traffic
 discrimina;on
 by
ISPs
will
 reduce
content
 innova;on 


Net
Neutrality
Opponents


Lack
of
flexibility
 for
ISPs
reduces
 their
investment
 incen;ves 


Former
CEO
of
AT&T,
Ed
 Whitacre:
“they
would
like
to 
 use
my
pipes
free,
but
I
ain’t
 going
to
let
them” 


Open
Debate,
…
S;ll
Lots
of
Controversy


Chopra
(CTO
Obama): 
 “Important
step
in
 preven;ng
abuses
 and
con;nuing
to
 advance
the
 Internet” 
 Al
Franken
(Democrat
 Senator):
“weak
rule” 


Research
Ques;ons



• Provide
formal
economic
analysis
to
shed
light
on
the
debate.

• What
is
the
effect
of
a
non‐neutral
regime
on:

• ISPs’
investments?

• CPs’
innova;on?

• Consumer
surplus
and
social
welfare?

• Contribu;on
to
literature

• Net‐neutrality
models:
Hermalin
and
Katz
07,
Choi
and
Kim
08,



Economides
and
Tag
08,
Schwartz,
Musacchio,
and
Walrand
09,
and
 many
more
yesterday
and
today
in
the
mee7ng.


• Two‐sided
markets:
Armstrong
06,
Rochet
and
Tirole
03,
Farhi
and


Hagiu
07.



Our
Approach

• We
plan
to
provide
some
answers
by
looking
at
a
model


whose
players
are:
 A
con;nuum
of
heterogenous
users
who
connect
to
1
ISP 
 and
many
CPs
 A
con;nuum
of
heterogenous
CPs
 A
doupoly
of
ISPs
that
invest
in
QoS



Net
Neutrality
as
a
Pricing
Rule:

 “Last
Mile”
Access
Fees


Neutral
regime:
CPs
are
not
charged
 to
access
offnet
consumers.
 CP
j 
 ISP
α ISP
β

qα qβ

$

Non‐Neutral
regime:
CPs
are
charged
 to
access
offnet
consumers.
 CP
j 
 ISP
α ISP
β

qα qβ

$ $

Preview
of
Main
Results



• Aggregate
ISPs
investments
are
higher
in
the
non‐neutral


regime.


• CPs’
profits
and
consumer
surplus
are
generally
superior


in
the
non‐neutral
regime.



• Social
welfare
is
also
generally
superior
in
the
non‐

neutral
regime.


Extensive
Form
Game:
Players


Duopoly of ISPs

Solve
for
subgame
perfect
Nash
equil.


• 1. Quality
Choice:
Plamorms
make


costly
investments
in
QoS
yα and
yβ


• 2. CP
Prices:
Plamorms
choose
CPs


connec;on
fees
wα
and
wβ


• 3. CP
Connec7ons:
CPs
decide
which


plamorm
to
join



• 4. Consumer
Prices:
Plamorms
choose


consumer
prices
pα
and
pβ


• 5. Consumer
Connec7ons:
Consumers


decide
which
plamorm
to
join


• 6. Consump7on
Decisions:
Consumers


 decide
CPs
to
patronize


ˆ φ(j)

φ(i)

Consumer
U;lity


• Connec;on
quality
consumer
i
–
CP
j:

• The
min
captures
a
“bo0leneck
effect”

• U;lity
consumer
i
–
CP
j:

• This

f ( . )
depends
on
addi;onal
services
offered
by
ISP



and
on
conges;on


• U;lity
consumer
i :



uij = qijf(γj)

CP
U;lity


• Adver;sing
rate
charged
by
CP
j
for
consumer
i:

• Neutral
model:
connect
to
α
or
β
• Non‐neutral
model:
directly
connect
to
α

and
/
or
β
• Connect
to
α:
• Connect
to
β:
• Connect
to
both
:

g(γj, qij)

πj =

• all consumers

g(γj, qij)di − w ˆ

φ(j)

πβ

j =

• consumers in β

g(γj, yβ)di − wβ πα

j =

• consumers in α

g(γj, yα)di − wα

πα

j + πβ j

Main
Results


Theorem
Neutral
Model:
Under
mild
technical
condi;ons,
there
 exists
a
unique
subgame
perfect
equilibrium
(SPE):
one
ISP
invests
 in
posi;ve
quality
and
the
other
chooses
not
to
invest.



• ISPs
differen;ate
in
quality
to
sooen
consumer
price
compe;;on



Theorem
Non‐neutral
Model:
Under
mild
technical
condi;ons,
there
 exists
a
unique
subgame
perfect
equilibrium
(SPE):
both
firms
 choose
to
invest
in
quality.


• ISPs
trade
off
differen;a;on
on
consumer
side
(that
sooens


compe;;on)

for
the
opportunity
to
make
profits
in
CP
side.


Welfare
Comparisons


• CPs:
prefer
the
non‐neutral
regime
because
investments
by


both
plamorms
increase
adver;sing
revenue.
Non‐neutral
 regime
doesn’t
reduce
market
coverage.


• Consumers:
prefer
the
non‐neutral
regime
because
increased


compe;;on
between
plamorms
lowers
consumer
prices.


• Low‐quality
plamorm:
prefers
non‐neutral
regime
because
it


exploits
its
monopoly
over
access.


• High‐quality
plamorm:
prefers
the
neutral
regime
because


plamorms
are
maximally
differen;ated.
 Theorem:
The
non‐neutral
regime
has
a
higher
social
welfare
 compared
to
the
neutral
regime.


• Defini7on
of
Net
Neutrality?
Is
it
realis;c
that
consumers



can’t
access
some
CPs?



• We
understand
this
as
basic
vs.
premium
service.

• It
would
be
nice
to
let
CPs
choose
investment
in
quality.

• Probably
can
be
done
but
at
the
expense
of
ISP


investments
or
not
having
compe;;on
among
ISPs.


• It
would
be
also
be
nice
to
add
conges7on
on
the
consumer


side.
May
be
more
realis;c
than
conges;on
on
the
CP
side.



• The
last
stages
become
harder
to
solve
(more
like
a


Wardrop
equilibrium)
making
it
much
harder
to
provide
a
 closed‐form
equilibrium
for
first
stages.


Observa;ons
/
Some
Limita;ons
of
Model


Conclusions


• Results
suggest
that
non‐neutral
regime
increases
aggregate


social
welfare
as
well
as
individual
welfare
of
almost
all
agents.


• Mechanisms
related
to
ISP
investments
seem
robust.

• Investment
incen;ves
play
key
role
in
net‐neutrality
debate:

• In
the
non‐neutral
regime
it’s
easier
to
extract
surplus


through
appropriate
pricing,
so
aggregate
investment
is
 larger.


• Net
neutrality:
NOT
a
zero‐sum
game.


• CP
and
consumer
u;li;es
are
enhanced
by
plamorm


investments.


• Inform
the
ongoing
debate
with
formal
economic
analysis


Investment
in
Two
Sided
Markets
and 
 the
Net
Neutrality
Debate

Nicolas
S;er‐Moses 
 Columbia
Business
School

Joint
work
with

 Paul
Njoroge,
Asuman
Ozdaglar
 MIT
 Gabriel
Weintraub
 Columbia
Business
School


Modélisa;on
en
Economie
des
réseaux
et
NEUtRalité
du
Net
 Kick‐off
Mee;ng,
May
26‐27
2011,
INRIA
Paris


Extensive
Form
Game:
Players


Duopoly of ISPs

Mass
of
CPs
with
heterogeneous
quality
γj with
endogenous
par;cipa;on 
 ISP
α ISP
β Plamorms
 with

 quali;es:
 Mass
of
consumers
with
heterogeneous
 preferences
for
quality
θi (full
coverage) 
 yα

yβ

Extensive
Form
Game:
Players


Open
Debate,
…
S;ll
Lots
of
Controversy