There continues to be heated debate about network neutrality: what it means, why it is important, what effect the policy has. In this talk, I will discuss how economic models of two-sided markets (or platforms) can help to shed light on these questions.

1. Two-sided perspectives on net neutrality
Robin Mason
Athens, January 2012
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2. Net neutrality in an economist’s language
No “priority lanes”: restriction of product line
ISPs cannot be content providers: restriction on vertical
integration
Network providers cannot charge content providers: restriction
on pricing
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3. What are two-sided markets?
Externalities between two sides of market
Platform interacts with both sides
Non-neutrality: relative prices matter
“A market is two-sided if the platform can affect the
volume of transactions by charging more to one side
of the market and reducing the price paid by the
other by an equal amount; in other words, the price
structure matters and platforms must design it so as
to bring both sides on board.” (Rochet and Tirole)
Examples: creedit cards; games consoles; dating agencies;
e-market places; newspapers
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4. ISPs as platforms
Cont Provs ISP Consumers
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5. Two-sided view of net neutrality
ISP matches content providers to consumers
Net neutrality asserts that ISP cannot charge content provider
...
. . . and can only charge end-users in a particular way
I.e., imposing a certain structure on two-sided pricing
Net effect not obvious:
lower price to one side ⇒ higher price to other
cet. par., membership of one side grows (declines)
but network effects mean that utility declines (grows)
Need a model to resolve
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6. A simple model
Two sides (1, 2) and a platform
Platform charges both sides; no other payments (e.g., from
consumers to content providers)
Costs per member f1 , f2
u1 (x) = α1 n2 − p1 − x, x ∼ U[0, x ]
¯
Hence n1 = α1 n2 − p1
1 2 1 2
W = n1 + n + n1 (p1 − f1 ) + n2 (p2 − f2 )
2 2 2
1 2 1 2
= n1 + n + n1 (α1 n2 − n1 − f1 ) + n2 (α2 n1 − n2 − f2 )
2 2 2
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7. Linear demand
α1 n2
p1
n1 = α1 n2 − p1
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8. Efficient and prof-max outcomes
∗
p1 = f1 − α2 n2 ;
π
p1 = f1 − α2 n2 + n1 .
∗ f1 + Af2 ∗ Af1 + f2
n1 = ; n2 = .
A2 − 1 A2 − 1
π 2f1 + Af2 π Af1 + 2f2
n1 = , n2 = .
A2 − 4 A2 − 4
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9. Net neutrality: p1 = 0
α1 f1 + f2
p1 = 0,
ˆ p2 =
ˆ .
2
α1 (α1 f1 + f2 ) α1 f1 + f2
n1 =
ˆ , n2 =
ˆ .
2(α1 α2 − 1) 2(α1 α2 − 1)
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10. Symmetric case: f1 = f2 = f
π π
p1 < p1 ,
ˆ p2 > p2 .
ˆ
π
n1 > n1 ,
ˆ
π
n2
ˆ n2 as α1 α2
π
If α1 = α2 , effects perfectly offset, and n2 = n2 !
ˆ
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11. Conclusions
Have looked at 1 aspect of net neutrality: ISP cannot charge
content providers
At least in one case
content providers definitely benefit
consumers may benefit, depending on relative network effects
platform’s profits decrease, of course
Have left out a lot of issues
priority lanes
incentives for platform to invest
other sources of revenues for content providers
competition between ISPs
But even in this simple setting, effect of net neutrality is subtle
Analysis not ideology
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