Price Discrimination, Two-Sided Markets, and Net Neutrality Regulation
26 Pages Posted: 5 Apr 2010 Last revised: 21 Apr 2013
Date Written: March 24, 2010
In an October 22, 2009 Notice of Proposed Rulemaking, the Federal Communications Commission posed a number of questions regarding the merits of price discrimination given the two-sided structure of broadband markets. The law and economics literature finds that price discrimination is presumptively welfare-enhancing, that it is frequently a response to competitive market forces rather than the absence of such forces, and that the merits of price discrimination are likely enhanced in a two-sided markets framework. This is the case because the platform provider must use prices to solve the “chicken and egg” problem - both sides of the market must be brought on board under conditions in which the relative valuations placed on the transaction can vary markedly across the two sides of the market. Hence, price discrimination is necessary to unleash the full potential of broadband markets. Another form of conduct of concern to the Commission is access tiering, in which broadband providers market different levels of service quality to content providers. Access tiering is an example of differential pricing rather than discriminatory pricing. Prohibitions on such practices would likely serve to reduce consumer welfare, suppress competition, and discourage investment in network infrastructure.
Keywords: net neutrality, broadband, regulation, network industries, quality of service, QoS, nondiscrimination, internet regulation
JEL Classification: L51, L43, L96
Suggested Citation: Suggested Citation