Scenarios for the Network Neutrality Arms Race
Creators: name: Lehr, William H.
name: Gillett, Sharon E.
name: Sirbu, Marvin
name: Peha, Jon
Publisher: name: Carnegie Mellon University
Year: 2008
Subjects: subject: 150399 Business and Management not elsewhere classified
subject: FOS: Economics and business
subject: FOS: Economics and business

description: Several factors suggest that meaningful network neutrality rules will not be enshrined in near-term U.S. telecommunications policy. These include disagreements over the need for such rules as well as their definition, efficacy and enforceability. However, as van Schewick (2005)1 has demonstrated in the context of the Internet, network providers may have economic incentives to discriminate in welfare-reducing ways; in addition, network operators may continue to possess market power, particularly with respect to a terminating monopoly.2 On the other hand, the literature on two-sided markets,3 the challenge of cost-recovery in the presence of significant fixed and sunk costs, and the changing nature of Internet traffic all provide efficiency-enhancing rationales for discriminatory pricing and traffic management. Thus, policy-makers face a daunting challenge: discriminatory behavior is likely to occur and distinguishing between good and bad discriminatory behavior is difficult. Assuming that various forms of network-based discrimination are likely to occur, broadband end-users may employ a variety of technical and non-technical strategies to counteract its effects, which in turn, will likely elicit further responses from the network operators. The goal of this paper is to characterize the resulting arms race by examining scenarios for how downstream end-users of broadband, sometimes in conjunction with upstream players (e.g. content providers), might respond to limit the potential harm from network-based discrimination. We identify three classes of end-user responses: 1. infrastructure-based bypass (e.g., municipal open access networks, mesh networking, or multi-homing); 2. technical and non-technical counter-measures (e.g., letter writing campaigns, end-to-end encryption, or onion routing); and 3. living with the differentiation (e.g., time-shifting and DVR buffering to use low-grade transport to view high-quality content). Our analysis suggests several implications for policy-makers. First, even in the absence of network neutrality regulation, end-users (and upstream providers) have a range of technical and market-based strategies for responding to discrimination. Second, providers may find it difficult to maintain forms of discrimination that are associated with positive externalities, such as an expanded user base or less congested networks. Thus, a priori, the welfare implications of end-user responses are ambiguous. Third, the availability and effectiveness of responses to discrimination are likely to vary not only by geography but also by the level of skill and economic resources available to particular customers, raising potential equity issues. Moreover, the effectiveness of end-user strategies depends critically on the mode of behavior adopted by the operator. We conclude that end-user responses are not sufficient in themselves to render concerns of non-neutral operator behavior mute. Finally, the outcome of the resulting network neutrality arms race is uncertain and reflects the dynamic nature of the Internet. Where or if this race will end, whether regulatory intervention to steer its progress is desirable, and if so, how to intervene efficiently remain complex questions that require further research and discussion.