The court of public opinion has seemingly swung in favor of net neutrality. So much so that Congress—including both Democrats and Republicans—is not debating whether net neutrality rules are necessary, but what form they should take.
The court of economists, however, is more divided. Like most policies, net neutrality regulations would have winners and losers, but not all economists agree on how these regulations might impact broadband investment, competition, and consumer welfare.
Two scholars, Columbia Law’s Tim Wu and Penn Law’s Christopher Yoo, are at the forefront of this debate. According to Wu, net neutrality protections are important to prevent any market distortion that could arise as a result of promoting or restricting certain websites or applications. Yoo, however, argues that net neutrality regulations would decrease competition and investment in the broadband sector by increasing barriers to entry for new broadband internet providers.
Let’s unpack each of these arguments. But first, it is important to define net neutrality. Although the definition can vary, net neutrality generally means that broadband providers should manage all internet traffic in the same way, and not charge either consumers or websites different rates to use their network.
Is it price discrimination or product differentiation?
Under traditional net neutrality principles, ISPs would treat all internet traffic equally—a complex task when not all internet traffic is the same. Different applications require different amounts of bandwidth and latency (for example, it requires significantly more internet bandwidth to stream a video than to send an email).
In fact, the recent rise in popularity of streaming video platforms such as Netflix and YouTube has forced ISPs to significantly expand their networks, Yoo says. As of 2017, Yoo estimates that Netflix and YouTube alone consume 55 to 60 percent of internet bandwidth in North America. He explains that if Netflix and YouTube cannot cover the costs of building higher capacity networks, a larger share will fall on consumers.
Net neutrality principles prevent ISPs from charging Netflix and YouTube higher rates than smaller content providers. Some economists would consider such an action a form of “price-discrimination,” because video content providers would pay higher prices to use the same network. However, to others, such an action is actually “product differentiation,” and economically logical, because video content providers use a higher level of broadband capacity and therefore require a higher quality product from ISPs.
Additionally, net neutrality principles prevent ISPs from charging end users different rates depending on application usage. For instance, they would prevent ISPs from hypothetically offering two levels of internet service: a high-speed plan for Netflix and YouTube watchers, and a low-speed plan for those who primarily use the internet for web searches or email. Former FCC chief economist Michael Katz argues that lack of choice generally hurts consumers; according to Katz, low-speed, low-cost options would increase the accessibility and affordability of the internet for consumers who do not stream videos online. Katz compares ISPs to FedEx and UPS; just as consumers and businesses can choose faster or slower shipping based on their individual utilities and willingness to pay, so too would they benefit from product differentiation within their internet providers.
The counterpart to this is Tim Wu’s argument, as mentioned earlier, that internet usage restrictions may result in changes in marketplace productivity. At the very least, such differential pricing might affect consumer choice. In a preliminary study, UNC economics professors Brian McManus and Jon Williams found that when an ISP raised prices for frequent video watchers, some consumers did respond to the price increase (e.g., by either reducing their video usage or switching to cable). McManus and Williams discuss that more research is necessary to quantify this behavior.
Do net neutrality regulations promote or stifle competition?
Earlier, I discussed Yoo’s theory that formal net neutrality regulations would diminish competition in the broadband sector. Competition is a concern because many households only have access to one or two broadband networks, and might not be able to choose their home internet provider.
Yoo says that, rather than regulating, policymakers should focus on encouraging smaller ISPs to enter the market. Product differentiation is one way to do so. Because of the high upfront costs to build broadband networks (and especially to build the “last mile” of network connecting to each individual household), new ISPs face high barriers to entry. Therefore, product differentiation could allow smaller ISPs to build more affordable “last mile” infrastructure for low-capacity uses, rather than be forced to either build high-capacity networks or not enter the market at all.
To supporters of net neutrality regulations, a fundamental competitive concern is the vertical integration of ISPs and content providers (e.g., if the same company controls both an internet network and online content, it could hypothetically promote its own websites and applications). Yoo states that such concerns only exist due to a lack of “last mile” competition, and that product differentiation would help alleviate vertical integration concerns. Similarly, Stanford public policy researcher Gregory Rosston writes that vertical integration is largely only a concern in a monopolistic market: “if a firm does not have market power, it is very unlikely to cause concern at another level in the chain because consumers have a choice.”
Even ISPs with strong market power have economic incentives to provide fast and reliable internet service, according to Boston College law professor Daniel Lyons, because it increases the market value of their product and therefore a consumer’s willingness to pay. For this reason, Lyons calls unfair prioritization concerns “largely hypothetical” and explains that “the more content a consumer can reach online, the more valuable the connection is, and the more the consumer is willing to pay for it.”
It’s a common economic question: what is the best way to address a natural monopoly, regulating or promoting competition? In other words, should the government impose net neutrality rules as a form of price regulation, or should it introduce additional competitors to the broadband market to increase supply and demand?
The FCC’s 2015 Open Internet Order states that net neutrality promotes broadband investment.
The FCC supported the 2015 Open Internet Order with a “virtuous circle” theory of investment: if we suppose that the open internet increases the number of edge providers, consumer demand for broadband would also grow. This, in turn, would stimulate broadband investment and further increase the number of edge providers.
Former FCC chief economist Tim Brennan offers an opposing “virtuous circle” theory: if receiving revenue from edge providers, ISPs would have incentives to attract more end users by cutting subscription rates, which would boost consumer demand for broadband. According to this theory, the additional demand would increase broadband investment, the number of edge providers, and the amount of revenue ISPs would receive from edge providers, thus continuing the cycle.
There are other theories as well. Gus Hurwitz, a professor at Nebraska College of Law, identifies two possible competing effects: (1) that additional regulations increase costs for ISPs, and therefore decrease incentives to invest in broadband, and (2) fewer regulations could give ISPs an incentive to degrade or maintain existing networks instead of invest in greater broadband capacity.
Katz, now at UC Berkeley, and Michelle Connolly of Duke University would agree with statement (1), with Connolly stating that “all else equal, any reduction in the rate of return on investment leads to lower investment.” New York University’s Nicholas Economides is among those who would support statement (2), contending that ISPs would not need to speed up paying edge providers when “it is sufficient to degrade” non-paying edge providers.
To fully understand the economic impacts of net neutrality regulations, we need more data.
Most of these net neutrality economic opinions are theoretical. Because the Federal Communications Commission has changed net neutrality positions more than once (in 2004, 2010, 2015, and again in 2018), we do not have enough data to conclusively identify the effects of each specific policy.
There are many unknowns in the net neutrality debate, but most people can agree that these rotating net neutrality regulations are confusing for consumers, ISPs, and everybody involved. For instance, if President Trump loses reelection in 2020, would a Democrat-majority FCC re-impose the 2015 Open Internet Order? And if a Republican wins the presidency in 2024, would a Republican-majority FCC repeal it once again?
Caitlin Chin was a senior online editor for the Georgetown Public Policy Review and a M.P.P. candidate at the McCourt School. She holds a bachelor's degree in government and Spanish from the University of Maryland.