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.
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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.
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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
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