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In the net neutrality debate, Internet Service Providers like AT&T (s T) and Verizon (s VZ), have said they need to charge content providers for prioritization so they can invest in improving infrastructure: faster internet service for all, they say.
But placing a price on prioritizing content creates an inherent disincentive to expand infrastructure. ISPs would profit from a congested Internet in which some content providers will be more than willing to pay an additional fee for faster delivery to users. Content providers like the New York Times (s NYT) and Google (s GOOG) would have little choice but to fork it over to get their information to end users. But end users would be unlikely to see the promised upgrades in speed. Those are some of the results of research we conducted on the Internet market.
Despite the fierce back-and-forth on net neutrality, there is a surprising lack of rigorous economic analysis on the topic. To change that, we built a game-theoretic economic model to address this question: Do ISPs have more incentive to expand their infrastructure capacity when net neutrality is abolished?
This is a key claim, used widely by ISP companies in arguing against maintaining a net neutral internet. The money from fees levied on content providers, they say, would be incentive to improve and expand infrastructure. In this argument, web surfers gain access to a faster internet.
But our analysis shows that if net neutrality were abolished, ISPs actually have less incentive to expand infrastructure.
Here is the intuition behind this result: Think of any road or highway you hate to drive on during rush hours. Say, I-5 in Seattle or the 495 loop in Washington, D.C. The highway is like the Internet, and the individual cars are the packets of data. The ISP is essentially the gatekeeper that controls the flow of cars on the highway.
If the ISP is allowed to snatch any car from the back of a very long line and put it in front of everybody else when the driver of the car pays a “priority delivery fee”, would the ISP have an incentive to keep the road congested, or, to expand the road capacity?
In this scenario, ISPs profit more when the roads are congested — if traffic is cruising, no one would feel the need to pay for faster service.
Currently, ISPs earn profits from attracting customers — mostly end users — using their computers for things like blogging, Tweeting, and downloading music and movies. For these people speed is an asset they might be willing to pay for. That gives ISPs motivation to improve their service and better compete for users.
But in a non-neutral Internet, the dynamic would change. ISPs would be able to strike deals to give certain Web sites or services priority in reaching users. For sites and services that pay up, there’ll be less waiting when the Internet’s information superhighway gets jammed — their pages will load faster. Those who don’t pay will be essentially forced to sit in traffic.
To see how ISPs and content providers might act under these proposed circumstances, we developed a model that describes the interactions of an ISP, multiple content providers and end-users. We examined how content providers, ISPs, and consumers would fare under both the neutral and non-neutral regimes. The most unambiguous finding from the model is that incentive for ISPs to invest in infrastructure is higher under the neutral regime than under the alternative. This is the case because the non-neutral regime allows ISPs to profit from greater congestion, undermining their return on infrastructure expansion.
Without net neutrality, ISPs will likely be better off and content providers worse off. This finding mirrors the reality of the debate, where the two sides have squared off on opposite sides.
If the goal of public policy is to expand broadband availability and reduce congestion, decision-makers should look beyond the immediate winners and losers and focus on the long-term consequences of their choices. Eliminating net neutrality will put a damper on investment in the Internet infrastructure that is likely to power a great deal of future innovation and growth — not exactly a recipe for maintaining the United States’ position as the global technological and economic leader.
Hsing “Kenny” Cheng and Shubho Bandyopadhyay are professors at the University of Florida, and Hong Guo is a professor at the University of Notre Dame.