Regulation and the Performance of Communication and Information Networks

Regulation and the Performance of Communication and Information Networks

Edited by Gerald R. Faulhaber, Gary Madden and Jeffrey Petchey

Digital markets worldwide are in rapid flux. The Internet and World Wide Web have traditionally evolved in a largely deregulated environment, but recently governments have shown great interest in this rapidly developing sector and are imposing regulations for a variety of reasons that are changing the shape of these industries. This book explores why the industrial organization of broadband ISPs, Internet backbone providers and content/application providers are in such turmoil.

Chapter 8: Spillovers and Network Neutrality

Christiaan Hogendorn

Subjects: innovation and technology, technology and ict


Christiaan Hogendorn INTRODUCTION In September 2009, FCC Chairman Julius Genachowski proposed two new principles for Internet policy, non-discrimination and transparency. Nondiscrimination is the key element of the policy known as ‘network neutrality’ and declares that the telephone and cable companies (Internet service providers or ISPs) that provide local broadband Internet service may not ‘block or degrade lawful traffic’ or ‘pick winners’. The ensuing rule-making process1 has brought forth vigorous debate. A prominent economic issue in that debate is the nature and extent of spillovers or externalities that come from household broadband Internet service. If positive spillovers are large and can cause market failure they become an important underlying economic justification for network neutrality regulation. Spillover benefits do not accrue to those making the decisions, and thus the decisions may not be optimal from society’s point of view. If ISPs begin new types of discriminatory practices, this would be a significant, discrete change in the economic configuration of the Internet. Among other things, this would cause large changes in the spillovers emanating from the Internet. The nature of Internet spillovers is not that different from the spillovers arising from many older infrastructure services. Telecommunications and other networks have been regulated as common carriers to prevent their private interests of discrimination hurting their public benefits from spillovers (Noam, 1994). The relationship of open access and network neutrality regulations to common carriage is complex (Hogendorn, 2005), but the basic purpose is to prevent discrimination. The practices addressed by network neutrality include an: (i)...

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