Network Neutrality and Provider Investment Incentives

This paper develops and analyzes a game theoretic model to study how the network regime (neutral or non-neutral) affects provider investment incentives, network quality and user prices. We formulate the conditions under which a non-neutral network is more favorable for providers and users. Our results indicate that the non-neutral regime is more favorable when the advertising rate is either low or high. When the advertising rate is high relative to the end-users' sensitivity to price, it is beneficial that the transit provider be able to charge the content providers who are not attached directly to them. This has the affect of passing some of the advertising revenue to the transit providers which in turn incentivizes them to invest. Conversely when the advertising rate is low, it is beneficial for all parties for transit providers to pay the content providers, which has the affect of sharing end-user revenue with the content providers in order to incentivize their investment. When the advertising rate is in the intermediate range, the neutral regime can be preferable (in terms of social welfare) because it prevents the multiple-indemnization that occurs in the non-neutral regime because transport providers tend to over-charge. In that latter case, the degree by which the neutral regime is preferable increases with the number of transit providers.