Net Neutrality and Online Innovation: An Empirical Study of the UK

Abstract

How does a fast lane on the internet affect the entry of online content providers? To answer this question, I provide empirical evidence that connection speed greatly influences consumption of online video and that changes in speed therefore directly impact the entry of video content providers. I also present a framework to think about the incentives of broadband providers to offer a fast lane with access fees which has direct profits effects as well as indirect demand effects. Finally, by combining the empirical model with the theoretical framework in a counterfactual analysis, I show that a fast lane with access fees only increases entry for content providers with high fixed costs of content provision. Using a novel data set on household consumption of online content and broadband penetration in local markets to estimate a structural model of industry demand and supply, this paper is the first to provide empirical evidence on the industry-wide effects of breaking net neutrality.