Power-Law Distributions in a Two-sided Market and Net Neutrality

TL;DR

This paper models a two-sided Internet market with power-law distributions for consumers and content providers to analyze the effects of net neutrality policies and derive analytical results for various regimes.

Contribution

It introduces a simple analytical two-sided market model with power-law distributions, providing insights into net neutrality, social optima, and revenue regimes.

Findings

Net neutrality and social optimum differ significantly unless CP productivity is high.

Analytical closed-form results are derived for multiple market regimes.

Power-law distributions are used to model Internet-related phenomena.

Abstract

"Net neutrality" often refers to the policy dictating that an Internet service provider (ISP) cannot charge content providers (CPs) for delivering their content to consumers. Many past quantitative models designed to determine whether net neutrality is a good idea have been rather equivocal in their conclusions. Here we propose a very simple two-sided market model, in which the types of the consumers and the CPs are {\em power-law distributed} --- a kind of distribution known to often arise precisely in connection with Internet-related phenomena. We derive mostly analytical, closed-form results for several regimes: (a) Net neutrality, (b) social optimum, (c) maximum revenue by the ISP, or (d) maximum ISP revenue under quality differentiation. One unexpected conclusion is that (a) and (b) will differ significantly, unless average CP productivity is very high.