Abstract
This chapter provides a simple theoretical framework to analyze optimal provision of quality-of-service of the internet by a monopolistic internet service provider (ISP) in the presence of vertical integration. There are two vertically differentiated content providers (CPs), and one of them is integrated with the ISP. The competing CP can access to the internet at free of charge. If left unregulated, the profit-maximizing ISP could provide positive levels of quality to both CPs due to perfect complementarity of internet and content. Especially, if quality provided by the affiliated content is sufficiently low, the integrated ISP offers relatively higher quality of internet service to the competing CP. In addition, this chapter identifies a market configuration in which non-discriminatory quality regulation might be welfare improving.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
In practice, Comcast’s XFINITY plan, Cisco and Telus data plans, Google Project Fi prices can be considered as usage-based prices.
- 2.
In the context of the long-distance telephony provided by a vertically integrated monopolist, Economides (1999) also assumes for the separable additive cost function in provision of qualities of both long-distance lines as well as local lines. Furthermore, empirical evidence on additive cost in the US telecom industry is provided in Beresteanu (2005).
- 3.
Indeed this assumption is especially related to the classical situation in which a monopoly selling a broad range of qualities (Mussa and Rosen 1978).
- 4.
In practice, content services can be free, but we consider that consumers dislike most advertising displays (banner ads, pop-up, videos…) or sales’ links when they access to content. Therefore our assumption can be interpreted as the cost for consumers to remove unwanted adverts appeared on free access content.
- 5.
This market configuration is also useful to reduce significantly technical issue in our analysis in the next section.
- 6.
This result is principally consistent with our finding in the companion paper examining the case in which the ISP and CPs are vertically separated (see Baranes and Vuong [2020]).
- 7.
When β is near 0, then \(\gamma^{(1)}\) will be infinite.
References
Bandyopadhyay, S., H.K. Cheng, and H. Guo. 2010. Net Neutrality and Vertical Integration of Content and Broadband Services. Journal of Management Information Systems 27: 243–276.
Baranes, E., and C.H. Vuong. 2020. Investment in Quality Upgrade and Regulation of the Internet. CESifo Working Paper No. 8074.
Beresteanu, A. 2005. Nonparametric Analysis of Cost Complementarities in the Telecommunications Industry. RAND Journal of Economics 36: 870–889.
Brito, D., P. Pereiraz,and J. Vareda. 2014. On the Incentives of an Integrated ISP to Favor Its Own Content. 20th ITS Biennial Conference, Rio de Janeiro, Brazil, 30 Nov.–03 Dec. 2014: The Net and the Internet—Emerging Markets and Policies, International Telecommunications Society (ITS).
Broos S., and A. Gautier. 2017. The Exclusion of Competing One-Way Essential Complements: Implications for Net Neutrality. International Journal of Industrial Organization. Elsevier 52 (C): 358–392.
Carlton, D., and M. Waldman. 2002. The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries. RAND Journal of Economics 2002:194–220.
Casadesus-Masanell, R., B.J. Nalebuff, and D. Yoffie. 2010. Competing Complements. Working paper.
Dewenter, R., and J. Rosch. 2016. Net Neutrality and the Incentives (Not) to Exclude Competitors. Review of Economics, De Gruyter 67 (2): 209–229.
Economides, N. 1999. Quality Choice and Vertical Integration. International Journal of Industrial Organization 17: 903–914.
Greenstein, S., M. Peitz, and T. Valletti. 2016. Net Neutrality: A Fast Lane to Understanding the Trade-Offs. Journal of Economic Perspectives 30: 127–150.
Haucap, J., and G.J. Klein. 2012. How Regulation Affects Network and Service Quality in Related Markets. Economics Letters 117: 521–524.
Krämer J., L. Wiewiorra, and C. Weinhardt. 2013. Net Neutrality: A Progress Report. Telecommunications Policy 37 (9): 794–813.
Mussa, M., and S. Rosen. 1978. Monopoly and Product Quality. Journal of Economic Theory 18: 301–317.
Njoroge, P., A. Ozdaglar, N.E. Stier-Moses, and G. Weintraub. 2012. Investment in Two Sided Markets and the Net Neutrality Debate. Review of Network Economics 12: 355–402.
Rey, P., and J. Tirole. 2007. A Primer on Foreclosure. In Handbook of Industrial Organization, vol. 3, ed. M. Armstrong and R. Porter. Amsterdam: North-Holland.
Riordan H. M. 2008. Competitive Effects of Vertical Integration. In Handbook of Antitrust Economics, ed. Paolo Buccirossi. Cambridge: MIT Press.
Schuett, F. 2010. Network Neutrality: A Survey of the Economic Literature. Review of Network Economics 9 (2): 1–15.
Singh, N., and Vives, X. 1984. Price and Quantity Competition in a Differentiated Duopoly. Rand Journal of Economics 15: 546–554.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2020 The Author(s)
About this chapter
Cite this chapter
Baranes, E., Vuong, C.H. (2020). QoS Investment, Vertical Integration and Regulation of the Internet. In: Alleman, J., Rappoport, P., Hamoudia, M. (eds) Applied Economics in the Digital Era. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-40601-1_11
Download citation
DOI: https://doi.org/10.1007/978-3-030-40601-1_11
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-40600-4
Online ISBN: 978-3-030-40601-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)