Managing network traffic with discriminatory strategies: A study of zero-rating in an Internet market monopoly

Abstract

Zero-rating is a recent practice that allows internet providers to discriminate among content. We offer new insights on the role of zero-rating practices when there is network congestion. In a market where consumers differ in their preferences for network speed, those who value network speed more create a congestion externality for an Internet Service Provider that limits its ability to capture consumer surplus from those who value network speed less. The monopolist may internalize the network congestion by using two discriminatory strategies: a menu of tariffs as a screening mechanism between consumers and zero-rating as a content revaluation tool. The combination of the two strategies acts as a mechanism to control network traffic without incremental provisioning of capacity. This is done by managing the network flow, through the strategic reallocation of the network traffic between content providers and consumers. Finally, zero-rating is detrimental to consumers independently of their type.