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The benchmark: Net neutrality
In this section we set as benchmark the net neutrality regime where the content provider does not participate on the investment process. The timing of the game is as follows (1) Investment, quality of service levels {αi, αj} are set by access providers noncooperatively (2) Access competition, access prices {pi, pj} are fixed by access providers non-cooperatively In this regime, the content provider plays a passive role in the game. There is no relation between the network operators and the content provider, there are no fees for content access nor fees for network usage, and all decisions are made by access providers only. However the content still generates advertising profits as a consequence of global connectivity.
Content provider with no commitment
A rather strong hypothesis in the exclusive bargaining framework is that the content provider can commit to one access provider when offering exclusive deals. This meant that if negotiation fails between {CP , ISPi} then access providers invested by their own means, leading to net neutrality quality levels. Here, this hypothesis is relaxed allowing the content provider to turn to the other access provider if negotiation has failed with the first one. However it is still supposed that once negotiation has failed between an access provider and the content provider, they cannot enter into renegotiation if the other pair has not achieve an agreement either.
Suppose that CP chooses to deal with ISPi first. Supposing that ISPi refuses or that they do not reach an agreement, CP turns to ISPj . If no agreement is reached between them, then access providers set qualities equal to (αn, αn) and we are in the exclusive dealing problem with commitment. The pair {CP , ISPj} sets the quality equal to αE and the excluded provider ISPi sets a quality αe. Providers at this stage have profits as in (1.11). This profits become then the outside option for the bargaining pair {CP , ISPi}. The bargaining pair set a contract that solves.
Access providers horizontally differentiated
Seminal papers on competition in telecommunications have chosen to model demand by a horizontally differentiated population (cf. Laffont et al. (1998); Armstrong (1998); Cambini and Valletti (2004)) rather than with a representative consumer. This choice of modeling is intuitively justified as a consumer has one telephone subscription only.
But the Hotelling model presents some limitations on respect to the elasticity of the demand, for this reason the paper was presented using a linear elastic demand. However the results are robust with un underlying Hotelling model. In order to gain some elasticity assume now that consumers, who are uniformly distributed on the [0, 1] segment, have a variable increasing and concave surplus of v(αi) with αi the quality set by ISPi. The net utility of consumer located at x and choosing ISPi is ¯v + v(αi) − 1 2γ |x − xi| − pi, with ¯v is the fixed utility of having access to the Internet, which it is supposed to be sufficiently hight that it keeps the market covered.
The parameter γ ≥ 0 is again the competition intensity between access providers. Then the indifferent consumer is located at.
Table of contents :
Acknowledgements
General presentation
Introduction
Network Neutrality
Next generation access networks
Technological progress
1 Bargaining power and the net neutrality debate
1.1 Introduction
1.2 The Model
1.3 The benchmark: Net neutrality
1.4 No Regulation
1.5 Competition policy implication
1.6 Extensions
1.7 Discussion
1.8 Appendix: Proofs of Propositions
2 Investment with commitment contracts: the role of uncertainty
2.1 Introduction
2.2 The model
2.3 Benchmark: Perfect information
2.4 Uncertainty
2.5 Access charge levels and the role of commitment
2.6 Welfare implications
2.7 Conclusion
2.8 Appendix: Proofs of Propositions
2.9 Appendix: Graphical representation of the game tree
3 Market structure and technological progress, a differential games approach
3.1 Introduction
3.2 Microeconomic foundations and the static model
3.3 The dynamic model
3.4 Comparative statics analysis
3.5 The time path
3.6 Spillovers
3.7 Discussion
3.8 Appendix: Proofs of propositions
3.9 Appendix: A robustness analysis
Bibliography of the chapter
