Revenue Sharing in the Internet: A Moral Hazard Approach and a Net-neutrality Perspective

TL;DR

This paper models revenue sharing contracts between Content Providers and ISPs using a moral hazard framework, analyzing how different investment strategies and neutrality policies impact incentives, ISP revenue, and social utility.

Contribution

It introduces a moral hazard model for revenue sharing in net neutrality contexts, comparing differentiated and non-differentiated ISP investments and their effects.

Findings

Non-neutral regimes favor the CP that monetizes demand better.

ISP revenue is higher under non-neutral regimes.

Social utility increases with non-neutral policies.

Abstract

Revenue sharing contracts between Content Providers (CPs) and Internet Service Providers (ISPs) can act as leverage for enhancing the infrastructure of the Internet. ISPs can be incentivized to make investments in network infrastructure that improve Quality of Service (QoS) for users if attractive contracts are negotiated between them and CPs. The idea here is that part of the net profit gained by CPs are given to ISPs to invest in the network. The Moral Hazard economic framework is used to model such an interaction, in which a principal determines a contract, and an agent reacts by adapting her effort. In our setting, several competitive CPs interact through one common ISP. Two cases are studied: (i) the ISP differentiates between the CPs and makes a (potentially) different investment to improve the QoS of each CP, and (ii) the ISP does not differentiate between CPs and makes a common investment for both. The last scenario can be viewed as \emph{network neutral behavior} on the part of the ISP. We analyse the optimal contracts and show that the CP that can better monetize its demand always prefers the non-neutral regime. Interestingly, ISP revenue, as well as social utility, are also found to be higher under the non-neutral regime.