An interesting view of Net Neutrality and a critique

[David Farber <dave () farber net>]

From: Gordon Jacobson <gaj () portman com>
Date: February 3, 2007 10:19:31 AM EST
To: dave () farber net
Subject: An interesting view of Net Neutrality

http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID812991_code542089.pdf?
abstractid=812991&mirid=1

Towards an Economic Framework for Network Neutrality Regulation

BARBARA VAN SCHEWICK
Technical University of Berlin; Center for Internet and Society,
Stanford Law School

Journal on Telecommunications and High Technology Law, Vol. 5, 2007


Abstract:
The paper develops an economic framework for network neutrality
regulation. Network neutrality rules forbid network operators to
discriminate against third-party applications, content or portals or to
exclude them from their network.

The analysis shows that calls for network neutrality regulation are
justified: In the absence of network neutrality regulation, there is a
real threat that network providers will discriminate against independent
producers of applications, content or portals or exclude them from their
network. This threat reduces the amount of innovation in the markets for
applications, content and portals at significant costs to society.

While network neutrality rules remove this threat, they are not without
costs. Due to the potentially enormous benefits of application-level
innovation for economic growth, however, increasing the amount of
application-level innovation through network neutrality regulation is
more important than the costs associated with it.

Apart from advancing the debate over network neutrality, the paper
highlights important limitations of the 'one monopoly rent' argument:
It shows that there are more exceptions to the 'one monopoly rent'
argument than have previously been identified and that these new
exceptions may be quite common in the Internet context. It shows that
exclusion may be a profitable strategy, even if the excluding actor does
not manage to drive its competitors from the complementary market. It
also shows that competition in the primary market may not always be
sufficient to remove the ability and incentive to engage in exclusionary
conduct.


Keywords: Network Neutrality

JEL Classifications: K23, L51

Accepted Paper Series


Suggested Citation
van Schewick, Barbara, "Towards an Economic Framework for Network
Neutrality Regulation" . Journal on Telecommunications and High
Technology Law, Vol. 5, 2007 Available at SSRN:


-----Original Message-----
From: David Farber [mailto:dave () farber net]
Sent: Sunday, February 04, 2007 6:03 PM
To: Faulhaber, Gerald
Subject: Re: Van Schewick paper

On Feb 3, 2007, at 12:04 PM, Faulhaber, Gerald wrote:

Barbara van Schewick is perhaps the brightest and most competent of the
net neutrality proponents, in that she understands quite well the
arguments regarding the "one monopoly rent" theorem (plus a very strong
engineering background).  This paper was presented a few years ago at
TPRC and she has been making the rounds presenting it at various US law
schools.  I know Barbara well (indeed,I'm an admirer of her talent), and
she is aware of my critique of her paper.

The "one monopoly rent" theorem states that under certain conditions, a
monopolist in a vertical chain (i.e., broadband provider carrying
content of application provider) has no need to vertically integrate in
order to capture more profit.  The monopolist can capture all the profit
anyway using its monopoly position.  There are, however, certain
conditions under which it does pay the monopolist ti integrate into
vertical markets to increase profit.

The basic issue with this paper is that she asserts that the various
theoretical exceptions to the one monopoly rent theorem, which could
support allegations of anticompetitive conduct, are in fact present in
the Internet, but without a shred of empirical evidence to support her
assertions.  This is not the first time that legal scholarship accepts
as truth assertions that seem backed by "common sense" but without
empirical support.  The rigorous standards of social science (in this
case, applied economics) don't seem to be valued, and Barbara's work
certainly falls into this trap.  A standard of proof that the Internet
falls prey to vertical anticompetitive behavior could be two-fold: (i)
can she demonstrate with empirical evidence that the exceptions to the
theorem do in fact apply?  Or (ii) do we actually see evidence of such
anticompetitive conduct?  In both cases, Barbara's paper offers no such
empirical evidence, nor does the paper seem bothered by this lack of
evidence.  We have had a number of personal discussions regarding this
point.  I hesitate to characterize her position on this, but she appears
to believes she has theoretical work-arounds; I disagree strongly.

She also asserts that the threat of anticompetitive behavior of
broadband providers (or BB providers setting prices to application
providers) would discourage innovation, which to her is the most
important welfare loss to such anticompetitive activity.  In fact,
discouraging innovation is the last thing BB providers would want to do
(again, subject to certain limited exceptions), because new applications
typically make their service even more valuable to customers.  She has
no empirical evidence of either the extent or existence of such
innovation discouragement, simply an assertion that it will be quite
large and quite damaging.  Again, without empirical evidence, this is
merely an assertion, nothing more.


Professor Gerald Faulhaber
Business and Public Policy Dept.
Wharton School, University of Pennsylvania Philadelphia, PA 19104
Professor of Law University of Pennsylvania





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