Economic Features of the Internet and Network Neutrality

The chapter discusses the issue of a possible abolition of network neutrality and the introduction of paid prioritization by residential broadband access networks. In short-run analysis where bandwidth is fixed and in the absence of congestion, network neutrality tends to maximize total surplus. When an ISP violates network neutrality and invests the extra profits to bandwidth expansion, the presence of more bandwidth alleviates the allocative distortion, and can even reverse it. The chapter discusses the network neutrality issue under the assumption of congestion, and characterizes the set of utility functions for which network neutrality is optimal, as well as utility functions where it is optimal to prioritize. The chapter also reviews regulatory rules in the United States on network neutrality.