Root Of Debate On Net Neutrality

Published Date: 02 Nov 2017

It is a traditional business practice for sellers of a product to differentiate the value of their services by charging for extra premium. For instance, mail delivery industries such as UPS and FedEx offer customers the different price of services based on the delivery speed and insurance. However, this commonplace business scheme has recently raised a great public controversy when it comes to the Internet Service Providers (ISPs), such as Verizon and At&T – who seek to 1.offer the premium transmission rate to some internet content providers (such as Yahoo, YouTube, etc.) for extra fees, and 2.intentionally degrade or block the data transmission for those who do not pay for the premium. This is part of the so-called net neutrality issue. 

The primary principle of net neutrality is based on a simple network architecture, in which the data inflow and outflow are freely transmitted through the cyberspace, while data is not inspected or controlled by any artificial intervention. As a result, all data is treated in equality according to the order of "first- in/first out basis". Based on this principle, the advocates of network neutrality demand a government regulation to legislatively prohibit the ISPs from restricting any data, content or access. On the other hand, the ISPs who would be potentially worse off by the implement of regulation, also seek the legal and social support to maintain an unregulated environment. The purpose of this paper is to examine the effect of government regulation in business by analyzing this specific net-neutrality case in a comprehensive and objective manner. Note that because there is no precise definition of network neutrality, in this paper we focus on the aspect of ISPs’ prioritization/restriction of web-data.

The opponent of net-neutrality argues for the non-regulation for three major reasons: 1. Non-regulation is beneficial to the Consumers; 2. Beneficial to the Business; 3. Beneficial to the Society.

1. Beneficial to the Public Consumers

Consumers, as the users of the internet, have benefited from a incessant succession of technological innovation by the ISPs – for example, from the primitive DSL network, to the latter fiber-cable, and to the latest Wireless 3G,; thus it is the innovation of ISPs that explains all the reason behind the speedy and secured network which we take as granted today. However, the government regulation which prohibits ISPs from charging extra fees could largely decrease the potential profitability of the network infrastructure. As a result, government regulation creates disincentives that prevent the ISPs from innovation and thus indirectly harms the consumers, because no ISP will risk investing trillions of capital in the unprofitable upgrade of network infrastructure.

In addition, the regulation of ISPs’ data discrimination would result in another negative externality –decrease the quality of service and general satisfaction of consumers. It is obvious that the volume of transmission differs from one web service to another – the volume difference between online game and online article is extremely large. Due to the limited capacity of bandwidth, the services occupying large volume would lead to a significant reduction of speed and quality on the other services. As a result, some time-sensitive services like email and some high security services like online-banking would certainly be adversely affected. In conclusion, the ISPs’ data discrimination scheme which guarantees the priority of certain important data flow benefits the general consumers.

Perhaps the most opposing argument is from the economic point of view that the ISPs as network gatekeeper will utilize their monopolistic power to set a high price and exploit the consumer surplus. However, in longer term, customers will benefit from ISP’s gatekeeper role. According to Randolph May, the market has its self-correcting power- for example, if ISP A discriminates against service X, there must exist another ISP B who has incentive to favor service X in order to meet the market demand (May3). Based on May’s assumption, the discrimination of ISPs creates a market structure where differentiated products efficiently meet the various demand of consumers.

2. Beneficial to the Business

Price discrimination is a classical business tradition that enables companies to catch more consumer surplus and expands the economic frontier of business. For example, the airline’s price discrimination expands the frontier of airline business in an effective way that the plane tends to remain fewer empty seats. By applying the analogical deduction from airline industry to internet industry, the opponent of net-neutrality argues that the discrimination of network operators creates a beneficial influence on the overall internet industry. Moreover, according to the statistic of Bell Telephone Inc, more customers subscribed to the network service plan when differentiated service is provided – this economic phenomenon is called "Network Effect". Therefore, the discriminated service of ISP stimulates the enlargement of population of subscribed consumers, which in turn leads a positively more hits on the websites, which directly catalyzes the demand for ISPs’ premium services, and ultimately increases more subscribed consumers (Liebowitz 1). As a result, a positive business cycle has formed through ISPs’ discrimination process, which created a chain benefit to ISPs, Content Providers, and Consumers.

On the other hand, the government’s regulation on ISPs could potentially result in a terrible consequence – nonexistence of ISPs in the long term. According to the basic economic theory that in a market of a few oligopolist, the oligopolists still face a great pressure of competition in such way that firms will price their product down to their marginal costs (Mankiw298).Based on this economic theory, in the market like network infrastructure, which is generally characterized by high fixed cost and low marginal cost, pricing to the marginal cost is not profitable based on its high fixed cost. Therefore the only solution for the ISPs to raise the profit is to offer differentiated services. If government restricts ISPs from discrimination, the differentiation solution is no longer possible and thus no longer profitable. In long term, the ISPs will quit the market, leaving the society with a tragedy.

On the other hand, the proponent of Net neutrality argues for the government regulation to resolve the imperfection of free market for 2 reasons- 1. Government regulation can resolve the market failure, 2. Can resolve the ethical issues.

1.Solution to the Market Failure

The proponents of government regulation are based on the principle that "the general equilibrium of market only works under very specialized conditions that seldom describe the real world" (Freeman 31); therefore the unregulated market cannot efficiently operate because of the potential market failures such as monopoly and negative externality. In the case of net- neutrality, the ISPs monopolistic role as internet gatekeeper would certainly raise the skepticism on whether the ISP will harm the social welfare.

The two major negative externalities arising from the ISPs monopolistic power can be concluded as the disincentive of innovation – refers to the innovation of both content providers and ISPs. According to Wu, the existence of internet speed-tier distorts the relationship between quality and demand, because consumers will tend to favor one website not because of its quality but its priority of access speed. As a result, the discrimination of internet gives rise to "a transformation from a market where innovation rules to one where deal-making rules", because firms’ best strategy to dominate the market is to make exclusive agreement with ISPs instead of innovating for the improvement of their products (Wu1).Consequently, a dramatic distortion of the free market prevails as the centralized actors (ISPs) determine the demand of product but not the market –a tragic transformation from market economy to "artificial economy". Moreover, because of the bargaining power of ISP’s monopolistic role, ISPs also tend to loss the incentive to innovate its network infrastructure. It is clear that without the regulation from government, market failures will cause the ISPs and content providers’ disincentive of innovation; thus harm the overall social welfare.

2.Solution to the Ethical issues

The proponent of net-neutrality argues that moderate government regulation is necessary when it comes to the ethical issue in the market because human being only acts in a narrowly egocentric way. Freeman, as a loyal proxy for government intervention, argues that "competition in the market puts people under great pressure to break the ordinary rules of decent conduct" (Freeman 28). Indeed the scandals of Enron and World Com have shown that human’s impossibility to be consistently virtuous, so the ethical issues is responsible for most of the failure of the free market’s self-corrected mechanism. In the net-neutrality case, the society faces the hazard that ISPs may potentially use their gatekeeper power to vertically integrate both the content market and network market by discriminating against their content rivals (Atkinson 73). Of course the potentially unethical conduct of ISPs’ vertical integration is detrimental to society and of course ISPs have no incentive to miss the opportunity for profit unless a regulator’s compelling force.

The tragic history of financial crisis have taught all American a lesson that the Corporate Social Responsibility (CRS) cannot be attained by pure morality. Therefore the only way to resolve the conflict between CRS and human egocentricity is through the legislation of morality, which requires the government’s regulation. The past examples of government regulations, such as the Antitrust Law, Glass-Steagall Act, and Sarbanes-Oxley Act, have been proved as an effective solution to the ethical problem, so that proponent of net-neutrality believes the government regulation is also the best solution to the net-neutrality issue.

=======================================

Conclusion

The debate of net neutrality highlights the essential conflict between two ideologies- free market and regulated market. Stakeholders appear to have little inclination to find a middle ground, and decision makers appear to have even less. . The proponent of network neutrality need to reconsider their position because nearly all of the concerns that have been raised are about potential conduct by network operators, not about actions that they have actually taken. Opponents of net-neutrality have also overstated the innovation they could offer and the influence to consumers. Regulators should agree to examine allegations of network bias and to evaluate the complaint from a public interest template that considers whether discrimination constitutes a social damage or a reasonable attempt at diversifying information services.