Platform Competition and Access Regulation on the Internet

We provide a new model of platform competition on the Internet to analyze the effect of Net Neutrality regulation on market outcomes. Consumers subscribe to two vertically related platforms, an Internet service provider (ISP) and a content network platform (CNP), to reach content providers (CPs). CPs interact with consumers via CNPs. Local ISPs provide an essential input: the Internet connection for consumers and the last-mile access for the CNPs. Access regulation that lowers the ISPs’ last-mile access charges may not increase consumer Internet prices, implying that the “seesaw principle” between consumer Internet prices and access charges may not hold in some cases. The effect on consumer Internet prices depends on how responsive CNPs’ advertising fees are to changes in the Internet prices and access charges. If CNPs’ fees are highly responsive to the changes, access regulation lowers both the fees from CPs and consumer Internet prices. On the other hand, if CNPs’ fees are not so responsive, access regulation induces higher consumer Internet prices. The overall welfare implication of access regulation depends on its impact on consumer demand for the Internet. If access regulation generates greater consumer demand for the Internet, it improves total welfare. However, if it reduces consumer demand substantially, CPs are also worse off, and welfare decreases.