Net Neutrality in a Hyperlinked Internet Economy

Abstract

In this paper, we study the welfare implications of the zero-price rule of the Net Neutrality (NN) regulation in an economy where two competing Content Providers (CPs) can engage in interlinking agreements. When CPs link their contents, they attract indirect visitors who first visit one CP and then the other so as to benefit from the complementarities of their products. We show that CPs are interested in reaching a linking agreement when the termination fee set by the Internet Service Provider (ISP) is not particularly high. The ISP may also find it profitable to set a low termination fee that leads CPs to reach a linking agreement. First, it benefits from the increase in the Internet traffic, provided that its cost of transmitting content is not too high. And second, the links increase the consumers' willingness to pay for the service, which allows it to set a higher subscription fee. Last, we show the cases in which the regulation of the termination fee can increase social welfare. We also point out that when the ISP's transmission cost is sufficiently low the imposition of the NN principle is justifiable, although this is a sufficient, but not a necessary, policy intervention for welfare maximization.