ISP pricing and Platform pricing interaction under net neutrality
Luis Guijarro, Vicent Pla, Jose Ramon Vidal
TL;DR
This paper develops a three-stage game to study how platform two-sided pricing interacts with net neutrality in the presence of access ISPs. By modeling masses of users and CPs, and a platform that intermediates them, it derives how prices and participation decisions propagate through the system, and compares scenarios with neutral and non-neutral ISPs. The main finding is that under current strong net neutrality, platforms can extract surplus from CPs, but this extraction disappears if ISPs are allowed two-sided pricing; CPs and welfare outcomes depend critically on the level of cross-network effects ($\delta$) and CP-advertising revenue ($\gamma$). The work provides policy-relevant insights into how platform and ISP pricing power shapes welfare, while noting limitations of the non-atomic CPs assumption and the restricted neutrality framework.
Abstract
We analyze the effects of enforcing vs. exempting access ISP from net neutrality regulations when platforms are present and operate two-sided pricing in their business models. This study is conducted in a scenario where users and Content Providers (CPs) have access to the internet by means of their serving ISPs and to a platform that intermediates and matches users and CPs, among other service offerings. Our hypothesis is that platform two-sided pricing interacts in a relevant manner with the access ISP, which may be allowed (an hypothetical non-neutrality scenario) or not (the current neutrality regulation status) to apply two-sided pricing on its service business model. We preliminarily conclude that the platforms are extracting surplus from the CPs under the current net neutrality regime for the ISP, and that the platforms would not be able to do so under the counter-factual situation where the ISPs could apply two-sided prices.