Academic

Yoo on Network Neutrality & Innovation

By Lawrence Solum

Christopher S. Yoo (University of Pennsylvania Law School) has posted Network Neutrality, Consumers, and Innovation (University of Chicago Legal Forum, Forthcoming) on SSRN.  Here is the abstract:

In this Article, Professor Christopher Yoo directly engages claims that mandating network neutrality is essential to protect consumers and to promote innovation on the Internet. It begins by analyzing the forces that are placing pressure on the basic network architecture to evolve, such as the emergence of Internet video and peer-to-peer architectures and the increasing heterogeneity in business relationships and transmission technologies. It then draws on the insights of demand-side price discrimination (such as Ramsey pricing) and the two-sided markets, as well as the economics of product differentiation and congestion, to show how deviating from network neutrality can benefit consumers, a conclusion bolstered by the empirical literature showing that vertical restraints tend to increase rather than reduce consumer welfare. In fact, limiting network providers' ability to vary the prices charged to content and applications providers may actually force consumers to bear a greater proportion of the costs to upgrade the network. Restricting network providers' ability to experiment with different protocols may also reduce innovation by foreclosing applications and content that depend on a different network architecture and by dampening the price signals needed to stimulate investment in new applications and content. In the process, Professor Yoo draws on the distinction between generalizing and exemplifying theory to address some of the arguments advanced by his critics. While the exemplifying theories on which these critics rely are useful for rebutting calls for broad, categorical, ex ante rules, their restrictive nature leaves them ill suited to serve as the foundation for broad, categorical ex ante mandates pointing in the other direction. Thus, in the absence of some empirical showing that the factual preconditions of any particular exemplifying theory have been satisfied, the existence of exemplifying theories pointing in both directions actually supports an ex post, case-by-case approach that allows network providers to experiment with different pricing regimes unless and until a concrete harm to competition can be shown.

And from the paper:

If consumer preferences are sufficiently homogenous that all end users effectively want the same thing from the network, the result is standardization on a single network, and consumers and content and applications providers all benefit from being part of the largest network possible. A different situation obtains when what consumers want from the network varies. As I have pointed out in my previous work, when consumer preferences are heterogeneous, standardization on any particular protocol involves a tradeoff.197 Consider the decision faced by two groups of end users that each prefers a different network standard. A group could adopt its preferred standard, in which case it would enjoy the benefits of employing the standard best suited to its preferences, but would forego the benefits of being part of a larger network. Or it could adopt the standard preferred by the other group, in which case it would enjoy the benefits of being part of a larger network, but would forego the benefits of employing the standard it prefers. This is why the leading network theorists regard the loss of product variety as one of the primary costs of standardization.198 These opposing considerations provide a basis for determining the optimal level of variety. Where the market will reach equilibrium depends on whether the benefits from being part of a larger network dominate the benefits from employing the standard best suited to a particular group?s preferences or vice versa.199

Wu presents the best arguments (of which I am aware) against net neutrality.  Highly recommended--despite my skepticism.

Full post as published by Legal Theory Blog on September 10, 2008 (boomark / email).