Recent research by Haas Professors Michael Katz and Benjamin Hermalin sheds new light on the discussion of network neutrality, showing that legislating a single tier of Internet service could prove harmful to both low- and high-end users.
One central issue in the net neutrality debate that lawmakers sparred over earlier this summer is whether providers of "last mile" Internet access services – typically phone or cable companies – should be allowed to offer more than one grade of service. For comparison, cable companies offer different programming packages, or software companies sell standard and professional versions of their product.
Some net neutrality proponents have suggested legislation is necessary to prevent creating a two-tier Internet for the haves and have-nots. But Katz and Hermalin argue that a single tier of service – as some network neutrality proponents are seeking – could leave low-end customers completely un-served and high-end customers to consume a lower quality product. That's because a firm is likely to choose to sell a product that is both too expensive for consumers who would have otherwise consumed a low-quality version of the product and also of lower quality than some high-end customers would otherwise have purchased if they had a choice of several products.
"There are benefits of variety and these network neutrality regulations would just get rid of them," says Katz, who holds the Sarin Chair in Strategy and Leadership. "The notion that everyone gets the best possible product is just wrong."
Katz and Hermalin, the Willis H. Booth Professor of Banking and Finance, reached that conclusion in a July 2006 working paper titled "The Economics of Product-Line Restrictions with an Application to the Net Neutrality Debate."
In their paper, the professors formally modeled the effects of restricting product lines such as those sought by some proponents of network neutrality regulation. Their model uncovered several consequences of restricting a firm to offering only a single product:
- Consumers who would otherwise have consumed a low-quality variant are priced out of the market. Such consumers at the bottom of the market – the ones that a single-product restriction is typically intended to aid – are almost always harmed by the restriction.
- Consumers in the "middle" market consume a higher quality product than they would have consumed if a firm offered multiple products.
- Consumers at the top of the market consume a lower quality product than they would have consumed if a firm offered multiple products.
"There are all sorts of unintended effects of these proposed network neutrality policies," Katz concludes. "We're hoping we can advise the rigor of the debate."
For a copy of the working paper "The Economics of Product-Line Restrictions with an Application to the Net Neutrality Debate," visit http://repositories.cdlib.org/iber/cpc/CPC06-059/
Recent research by Haas Professors Michael Katz and Benjamin Hermalin sheds new light on the discussion of network neutrality, showing that legislating a single tier of Internet service could prove harmful to both low- and high-end users.