Local Broadband Access: Primum Non Nocere or Primum Processi? A Property Rights Approach

39 Pages Posted: 5 Aug 2003

See all articles by Bruce M. Owen

Bruce M. Owen

Stanford University

Gregory L. Rosston

Stanford Institute for Economic Policy Research

Date Written: July 2003


High-speed or "broadband" Internet access currently is provided, at the local level, chiefly by cable television and telephone companies, often in competition with each other. Wireless and satellite providers have a small but growing share of this business. An influential coalition of economic interests and academics have proposed that local broadband Internet access providers be prohibited from restricting access to their systems by upstream suppliers of Internet services. A recent term for this proposal is "net neutrality."

We examine the potential costs and benefits of such a policy from an economic welfare perspective. Using a property rights approach, we ask whether transactions costs in the market for access rights are likely to be significant, and if so, whether owners of physical local broadband platforms are likely to be more or less efficient holders of access rights than Internet content providers. We conclude that transactions costs are likely to be lower if access rights are assigned initially to platform owners rather than content providers. In addition, platform hardware owners are likely to be more efficient holders of these rights because they can internalize demand-side interactions among content products. Further, failure to permit platform owners to control access threatens to result in inadequate incentives to invest in, to maintain, and to upgrade local broadband platforms.

Inefficiently denying platform owners the ability to own access rights implies a need for price regulation; otherwise, there will be incentives to use pricing to circumvent the constraint on rights ownership. Price regulation is itself known to induce welfare losses through adaptive behavior of the constrained firm. The impact on welfare might produce a worse result than the initial problem, assuming one existed.

Much of the academic interest in net neutrality arises from the belief that the open architecture of the Internet under current standards has been responsible for its remarkable success, and a wish to preserve this openness. We point out that the openness of the Internet was an unintended consequence of its military origins, and that other, less open, architectures might have been even more successful. A policy of denying platform owners the ability to own access rights could freeze the architecture of the Internet, preventing it from adapting to future technological and economic developments.

Finally, we examine the net neutrality issue from the perspective of the "essential facility doctrine," a tool of the common law of antitrust. The doctrine establishes conditions under which federal courts will mandate access by competitors to the monopoly platform of a vertically-integrated firm. Because local broadband Internet access is not today a bottleneck monopoly (there are several competitors and the market is at an early stage of development), the essential facilities doctrine would not permit reassignment of access rights from platform owners to competitors. We conclude that "net neutrality" is a welfare-reducing policy proposal.

Keywords: Broadband, Internet access, net neutrality

Suggested Citation

Owen, Bruce M. and Rosston, Gregory L., Local Broadband Access: Primum Non Nocere or Primum Processi? A Property Rights Approach (July 2003). Available at SSRN: https://ssrn.com/abstract=431620 or http://dx.doi.org/10.2139/ssrn.431620

Bruce M. Owen (Contact Author)

Stanford University ( email )

366 Galvez Street
Stanford, CA 94305-6015
United States

HOME PAGE: http://siepr.stanford.edu/

Gregory L. Rosston

Stanford Institute for Economic Policy Research ( email )

Landau Economics Building
579 Serra Mall at Galvez St.
Stanford, CA 94305-6015
United States

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