Migration to a non-neutral internet: Economics modeling and analysis of impact

Abstract

Net neutrality on the Internet is perceived as the policy that mandates Internet Service Providers (ISPs) to treat all data equally, regardless of the source, destination, and type of the data. In this work, we consider a scheme in which there exist two ISPs, one Content Provider (CP), and a continuum of end-users. One of the ISPs are neutral and the other is non-neutral, i.e. she offers a premium quality to a CP in exchange of a side-payment. In addition, we consider that the CP can differentiate between ISPs by controlling the quality of the content she is offering on each one. We consider a near-perfect competition between ISPs, i.e. a scenario that none of the ISPs has high market power, and formulate the game as a sequential game. We show that there exist a unique SPNE for the game. In the unique SPNE outcome of the game, the CP pays the side-payment to the non-neutral ISP and offers her content with the premium quality. On the other hand, the CP does not offer her content on the neutral ISP. Thus, the neutral ISP would be driven out of the market. We show that in this case, a neutral regime yields a higher end-user welfare than a non-neutral regime.