Network Neutrality versus Paid Prioritization: Analyzing the Impact on Content Innovation

We examine the link between network neutrality (NN) and content innovation on the Internet by comparing the impact of NN and packet discrimination (PD) regimes on content innovation. We do this in the context of a two-sided market model that simultaneously considers content provider (CP) and consumer decisions concerning market entry and participation while taking into account consumers' response to network congestion. We find that content innovation flourishes under NN to a greater degree than under PD due to two effects we uncover: the generation of what we call a pro bono innovation zone in which CPs are able to enter the market without contributing to network provider profits; and the cross-side congestion effect, a negative network externality wherein higher broadband market coverage levels result in greater congestion for CPs, and increased content results in greater congestion for consumers, taking into account consumers' strategic response to network congestion. These results have important implications for current public policy debates regarding the Federal Communications Commission's Open Internet Rules.