Role of Digital Divide in Optimal Zero-Rating Policy

Several Internet Service Providers (ISPs) and Content Providers (CPs) have proposed zero-rating plans whereby consumers get access to certain websites without paying for it. While consumer and open-access advocates have decried these plans, arguing that they are anti-competitive and violate the principles of net neutrality, ISPs and CPs have argued that such initiatives enable segments of the world population - especially those in developing economies - to finally join the rest of the world in accessing the Internet. Extant literature on the topic has contributed to this debate by analyzing the optimality of zero-rating policy as an extension of net neutrality. In contrast, our work looks at this issue in the presence of a digital divide. We analyze the ISP's and the CPs' decision-making as well as its subsequent impact on social welfare when a fraction of the population does not have access to the Internet. Thus, the study fills the research gap of analyzing the impact that context (Internet penetration, in particular) may have on different network management strategies, under zero-rating plans. Our research finds that zero-rating plans can enhance social welfare in many cases in the presence of a digital divide. However, Internet regulators need to be vigilant, since the ISPs may sometime deviate from a strategy that maximizes social welfare. The findings have implications for policymakers arguing for their nuanced role in regulating zero-rating policies, rather than indiscriminately allowing or disallowing the practice.