Much of the Network Neutrality (NetNeutrality) debate has centered on the argument whether Internet Service Providers (ISPs) should be allowed to provide service differentiation and/or user discrimination, with the notion of “user” being either content providers (CPs) or consumers. Proponents of NetNeutrality, mostly the CPs, have argued that the Internet has been “neutral” since its inception, and that has been a critical factor in the innovation and rapid growth that has happened on it. The critics of NetNeutrality, mostly ISPs, claim that without some sort of service differentiation, ISPs will lose the incentive to invest in the networks, and the end-user Quality of Experience (QoE) will suffer. Both camps implicitly or explicitly claim that their approach is beneficial for consumers. The controversy rages on, though, with lawsuits challenging the applicability of Universal Access to Internet, with different ISP peering models, with discussion of traffic flow management techniques, and with content delivery all being cast as a NetNeutrality issues. But, are they?
The paper looks at NetNeutrality from the consumer’s point of view under both monopolistic and oligopolistic telecommunication market scenarios. A lot of arguments for, as well as against, NetNeutrality live in an idealized world where economies of scale do not exist and monopolies cannot emerge, and therefore perfect competition solves all problems. The paper reveals that reality is more nuanced, and hence examines monopolistic scenarios too.
Game-theory is applied to model the user demand for content and the rate allocation mechanisms in the network. The interplay between the two determines the rate equilibrium for traffic flows, based on which consumer utility can be calculated. Also the model of price discrimination is for the ISPs to offer two classes of service to CPs. The ISP divides its capacity into a premium and an ordinary class, and CPs are charged extra for sending traffic in the premium class. The discussion also identifies and analyzes the strategic games played between ISPs, CPs, and consumers for a monopolistic scenario, and for oligopolistic scenarios. Last, the notion of a Public Option ISP, which is neutral to all CPs, is introduced. The Public Option ISP can be implemented by processes like local loop unbundling, which allows multiple telecommunications operators to use connections from the telephone exchange to the customer’s premises, in a monopolistic market, and either government or a private organization could run the ISP, and still be profitable.
Under this framework, the findings are as follows.
- The impact of NetNeutrality on consumer utility depends on the nature of competition at the ISP level. Concretely, a neutral network might be beneficial for consumers under a monopolistic regime, whereas a non-neutral network is advantageous for consumers under oligopolistic scenarios.
- Introducing a Public Option ISP is advantageous for consumers. In a monopolistic situation, the Public Option ISP offers the best scenario for consumers, followed by network-neutral regulations, and an unregulated market being the worst.
- In oligopolistic situations, the Public Option ISP is still preferable to network-neutral regulations. However, since the incentive for an ISP to gain market share is aligned with maximizing consumer utility, no regulation is needed to protect the consumers.
- Under an oligopolistic competition, any ISP’s optimal pricing and service differentiation strategy, whether network-neutral or not, will be close to the one that maximizes consumer utility. Moreover, under a probable equilibrium where ISPs use homogeneous strategies, their market shares will be proportional to their capacities, which implies that ISPs do have incentives to invest and expand capacity so as to increase their market shares.
The paper sheds light on the NetNeutrality debate and concretely identifies where and how regulation can help. In particular, the identification of the Public Option ISP is especially important as it provides a solution that combines the best of both worlds, protecting consumer interests without enforcing strict regulations on all ISPs.