This paper analyzes two business practices on the mobile internet market, paid prioritization and zero-rating.
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These practices are tools for the internet service provider (ISP) to alter competition on the content market.
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When the asymmetry between content providers is limited, in particular with regard to their ability to attract traffic or to monetize it, we show that, the ISP can extract more surplus from consumers by privileging the relatively weaker content and restoring symmetry between content providers.
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We show that the ISP chooses prioritization when traffic is highly valuable for content providers and congestion is severe, and zero-rating in all other cases.
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We find that a policy banning prioritization can lead to zero-rating and a reduction in consumer surplus.
Abstract
This paper analyzes two business practices on the mobile internet market, paid prioritization and zero-rating. These practices allow the internet service provider to discriminate different content types. With prioritization, the ISP delivers content at different speeds; with zero-rating, the ISP charges different prices. In recent years these practices have attracted considerable media attention and regulatory interest. When the asymmetry between content providers is limited, in particular with regard to their ability to attract traffic or to monetize it, we first show that the ISP can extract more surplus from consumers by privileging the relatively weaker content and restoring symmetry between content providers. Next, we show that the ISP chooses prioritization when traffic is highly valuable for content providers and congestion is severe, and zero-rating in all other cases. Finally, we find that a policy banning prioritization can lead to zero-rating and a reduction in consumer surplus.
We would like to thank Paul Belleflamme, Marc Bourreau, Anna D’Annunzio, Johannes Johnen, Bruno Jullien, Sergey Lychagin, Norbert Maier and conference and seminar participants at the 12th Digital Economics Conference (Toulouse), VIII IBEO Media Economics workshop (Alghero), 4th Industrial Organization in the Digital Economy workshop (Liege), 10th Digital Economics conference (Paris), EEA (Cologne), EARIE (Athens), Institute of Economics, CERS (Budapest) and CORE (Louvain-la-Neuve) for discussion and comments. This research was funded through the ARC grant for Concerted Research Actions, financed by the French speaking Community of Belgium. Somogyi has been a Carrier Integration Fellow of the CERGE-EI Foundation while undertaking the research in this paper. The research reported in this paper was supported by the BME NC TKP2020 grant of NKFIH Hungary.
