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Net Neutrality: An Economic Analysis

Lim, Benjamin Alex (2011)
Honors Thesis (47 pages)
Committee Chair / Thesis Adviser: Banerjee, Samiran
Committee Members: Ho, Wan-Li ; Nagy, James
Research Fields: Economics, Theory; Economics, General
Keywords: Economics; Economic Theory; Net Neutrality; Internet; content provider; social welfare
Program: College Honors Program, Economics and Mathematics
Permanent url: http://pid.emory.edu/ark:/25593/93b43

Abstract

This paper explores the filed of net neutrality. Specifically, it analyzes the social welfare
implications of the zero-price rule and discrimination effects. On one hand, when the consumers
can only choose either good 1 or good 2, there exists a market with competitive prices for both
goods when the Internet service providers (ISP) discriminates by charging a fee to only one of
the content providers (CPs). Under net neutrality, only one content provider can sustain positve
prices, resulting in losses in consumer's utility, profits of firms, and ultimately the decrease in
social welfare. On the other hand, when consumers can choose to buy good 1, good 2, or both
goods, net neutrality proves to be more welfare enhancing because of an increase in the number
of Internet users, total profits of the CPs, and the total consumer's utility.

Table of Contents

Table of Contents
1. Introduction..…………………………………………………………………………1
2. Model 1………………………………………………………………………...……….5
2.1 Net Neutrality……………………………………….………………….….....…...7

2.1.1 Comparative Statics………………………………….…….……..............10
2.2 Non-Net Neutrality……………………………………………......…...….…..10

2.2.1 Comparative Statics………………………………………..............….….13
2.3 Welfare Comparisons…………………………………….………........….....14

2.3.1 Comparative Statics…………………………………….……..............….17
3 Model 2…………………………………………………………………..…….………18
3.1 Net Neutrality…………………………………………………….........………..20

3.1.1 Comparative Statics………………………………….…...............………22
3.2 Non-Net Neutrality…………………………………………......….….……….24

3.2.1 Comparative Statics……………………………………..............….…….26
3.3 Welfare Comparisons……………………………………......………….…….27

3.3.1 Comparative Statics……………………………………..............….…….31
4 Conclusion…………………………………………….………………………...……32
References…………………………………………….………………….……….…….33
Appendix 1…………………………………………….……………….…….….………35
Appendix ………………………….………………………………………….....…...…37

List of Figures
Figure 1: The Structure of the Internet (Model 1)………………………………......…....3
Figure 2: A Continuum of Consumer's Value of Good 1 or Good 2 (Model 1)….....6
Figure 3: Best Responses for CP1 (BR1) and CP2 (BR2) (Model 1 NN)……………..9
Figure 4: Best Responses for CP1 (BR1) and CP2 (BR2) (Modle 1NNN)…………..12
Figure 5: Graph of Consumer's Value of Good 1 and Good 2 (Model 2)…………...19
Figure 6: Best Responses for CP1 (BR1) and CP2 (BR2) (Model 2 NN)……………21
Figure 7: Best Responses for CP1 (BR1) and CP2 (BR2) (Model 2 NNN)………….24

List of Tables
Table 1: Comparative Statics with respect to alpha (Mode1 1 NN)…………….……10
Table 2: Comparative Statics with respect to alpha (Model 1 NNN)…….……….….13
Table 3: Comparative Statics with respect to alpha(Model 1 WF)……….………,.…17
Table 4: Comparative Statics with respect to alpha (Model 2 NN)………….…….…22
Table 5: Comparative Statics with respect to alpha (Model 2 NNN)………….….….26
Table 6: Comparison of Variables in Equilibrium under NN and NNN (Model 2)..27
Table 7: Comparative Statics with respect to alpha (Model 2 WF)……………….....30

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