When Best Effort is Not Good Enough: Incomplete Contracting, Risk Allocation, and Demand for Consumer Protection in the Market for Broadband Access Services

Abstract

Starting from a luxury available to small networks of relatively high-income users, high-speed access to the open Internet has become a necessity for social and economic participation of individuals, competitiveness of business, and economic development. In the transition of broadband from a luxury to a necessity over the past two decades, “best effort” retail contracts (i.e. up to xMbps, subject to varying network conditions) have provided Internet service providers (ISPs) with significant flexibility in managing scarce capacity in response to growing consumer demand for network resources. Over time however, the emergence of a wide variety of advanced Internet applications that require reliable high-speed connectivity (i.e. minimum effective bandwidth/speed, Quality of Service (QoS) guarantees) has stimulated the development of a wide range of network management technologies that enable the delivery of quality of service guarantees and fine-grained service quality and price differentiation (e.g. across applications, senders, users). The combination of these factors has led to the development of a multi-tiered Internet in which scarce capacity is bifurcated into a basic best effort access path to the open Internet and a luxury class of prioritized/sponsored services on the same physical infrastructure. From an economic perspective, mitigating negative externalities from growth in the “fast lane” on best effort “slow lanes” in this differentiated broadband ecosystem have emerged as a seemingly intractable challenge in countries that are further behind in the transition from legacy copper to next generation fiber/4G broadband technologies. Previous research analyzes the emergence of a two-tiered Internet and draws policy inferences primarily in terms of the existence of market power by monopolistic/duopolistic infrastructure providers, inefficient discrimination by this class of gatekeepers to the open Internet, and/or innovation on the edges of the system. There has been little attention paid to the challenges best effort retail contracts that allocate the risk of capacity under-provisioning pose to buyers in a market where more and more applications require minimum service reliability standards. Voices of consumers are therefore almost always supressed in research and policy debates about the optimal design of institutions for ensuring universal access to the open Internet. This article tries to fill this gap by documenting barriers to accessing the open Internet faced by consumers. The first part of the paper provides an overview of the literature on the implications of imperfect contracting for the efficient operation of market systems and as a driver for consumer protection regulation. Then we use quantitative content analysis/natural language processing (NLP) techniques to analyze over 20,000 consumer complaints and carrier responses submitted to the U.S. Federal Communications Commission (FCC) between 2015 and 2017 obtained through the Freedom of Information Act (FOIA) requests to map the interplay between buyers and sellers in a market for Internet connectivity. We conclude with an analysis of public and private legal mechanisms that may help counteract negative externalities from the rise of a two-tiered Internet on quality and affordability of access to the open Internet.