Is Non-Neutrality Profitable for the Stakeholders of the Internet Market? - Part II

TL;DR

This paper analyzes the strategic interactions and outcomes in internet markets with non-neutrality, considering transport costs, and identifies conditions under which non-neutral regimes are profitable for ISPs and welfare-enhancing for users.

Contribution

It extends previous models by providing analytical results for higher transport costs, characterizes all possible SPNE strategies, and explores the impact of non-neutrality on ISP payoffs and user welfare.

Findings

Existence of a unique SPNE when high user inertia is present.

Non-neutral ISPs generally earn higher payoffs, but not always.

Non-neutral regimes can increase user welfare under certain market conditions.

Abstract

In this part of the paper, we obtain analytical results for the case that transport costs are not small (complement of Part I), and combine them with the results in Part I of the paper to provide general results for all values of transport costs. We show that, in general, if an SPNE exists, it would be one of the five possible strategies each of which we explicitly characterize. We also prove that when EUs have sufficiently high inertia for at least one of the ISPs, there exists a unique SPNE with a non-neutral outcome in which both of the ISPs are active, and the CP offers her content with free quality on the neutral ISP and with premium quality on the non-neutral ISP. Moreover, we show that an SPNE does not always exist. We also analyze a benchmark case in which both ISPs are neutral, and prove that there exists a unique SPNE in which the CP offers her content with free quality on both ISPs, and both ISPs are active. We also provide extensive numerical results and discussions for all ranges of transport costs. Simulation results suggest that if the SPNE exists, it would be unique. In addition, results reveal that the neutral ISP receives a lower payoff and the non-neutral ISP receives a higher payoff (most of the time) in a non-neutral scenario. However, we also identify scenarios in which the non-neutral ISP loses payoff by adopting non-neutrality. In addition, we show that a non-neutral regime yields a higher welfare for EUs than a neutral one if the market power of the non-neutral ISP is small, the sensitivity of EUs (respectively, the CP) to the quality is low (respectively, high), or a combinations of these factors.