One of the most contentious aspects of net neutrality is the degree to which Internet Service Providers (ISPs) should be able to vertically integrate with content providers. The concern is that a vertically integrated firm could prioritize delivery of its own content at the expense of its competitors absent net neutrality rules. The questions then arise: when would ISPs would actually face such incentives and how might they affect consumers?
Demand for the ISP’s primary product (Internet access) depends on demand for services available on the network. Thus, the key question is when does blocking content, charging access fees to providers, or promoting the ISP’s content over others’ reduce demand for the network (and, presumably, harm consumers)?
As with most difficult questions in economics, the answer is, “it depends.” And, in Farrell’s model, it depends on the information available to consumers.
In the positive scenario, consumers understand the ISP’s practices. In this case, the model predicts that an ISP would find it profitable to engage in practices inconsistent with net neutrality only when such behavior also benefits consumers. That is because consumers will make their subscription decisions based on its total price, and if the consumers fully understand all additional costs (price or otherwise) then the ISP will have to reduce the price of access to compensate. At the same time, charging content providers allows ISPs more ways to cover their costs and reduce the amount they charge consumers. In this scenario, ISP’s and consumer’s interests are aligned.
What are the implications for net neutrality? When consumers are sufficiently informed, vertically integrated ISPs have incentives to increase competition and efficiency in edge markets because it increases the value of their network. Higher network value in turn allows them to charge higher internet access fee. Thus, achieving the goals of net neutrality may not require net neutrality rules, per se, but policy initiatives that improve consumer awareness.