Prerequisites for a Network Neutrality Solution : Lessons from an Empirical Analysis of the Japanese Broadband Market

Abstract

From an economic viewpoint, the author considers it to be appropriate to interpret the network neutrality problem as a combination of a congestion problem caused by limited network capacity and an anticompetitive problem caused by the dominance of major Internet service providers (ISPs). In Japan, where asymmetric regulation on the incumbent Nippon Telegraph and Telephone Corporation seems to have successfully maintained competitiveness in the retail ISP market, the Ministry of Internal Affairs and Communications (MIC) has focused on fighting network congestion by introducing a “coregulation”-like framework. The validity of this approach is heavily dependent on two prerequisites: (a) effective competition in the broadband ISP market and (b) sufficient user literacy on network quality. As for the first condition, given the Herfindahl-Hirschman Index, the MIC has stated that the current ISP market in Japan has no immediate anticompetitive threat. However, if switching costs for broadband users are very large, the Herfindahl-Hirschman Index cannot reflect the real competitive level. In this study, switching costs based on a model-based estimation as well as a questionnairebased estimation are calculated. This study concludes that the Japanese broadband ISP market may not be as competitive as it looks, suggesting that the MIC has reasons to reconsider its current policy on network neutrality. Although the discussion in this paper is based on Japanese empirical data, it can apply to other nations that have a similar structure in the broadband ecosystem as that of Japan and where significant market power regulations on incumbent network operators represent the major tool to attain competitiveness in the ISP market.