Democracy & Technology Blog What does game theory say about net neutrality regulation?

Researchers at the Warrington College of Business Administration at the University of Florida have developed a “stylized game-theoretic model” to identify winners and losers under net neutrality regulation. Their conclusion: contrary to the conventional wisdom, broadband providers would actually have more incentive, not less, to upgrade their networks under net neutrality regulation. Here is part of the logic, according to, which quotes one of the researchers:

The whole purpose of charging for preferential treatment to content providers is that one content provider gains some edge over the other,” says Subhajyoti Bandyopadhyay, who co-authored the study with Cheng. “But when the capacity is expanded, this advantage becomes negligible.

In other words, if there is ample bandwidth there would be nothing to ration. Broadband providers would be able to charge more if there is artificial scarcity. But if private investors are willing to invest in abundance rather than in scarcity, we should encourage them to do that. In the real world, investors actually do pursue temporary advantages. It just depends on the total anticipated size of the return.
Bandyopadhyay’s point that the broadband providers’ ability to charge for preferential treatment declines as network capacity expands proves only that if we allow market forces to operate, we won’t need net neutrality regulation at all.

But the researchers’ analysis highlights a basic problem for broadband providers: the incentive to expand isn’t the same as the ability to do so. During the dot-com boom, when $90 billion was invested in the long haul networks that comprise the Internet backbone, investors ignored the local “last-mile” connections of the incumbent phone companies. That wasn’t for lack of interest. Investors wanted to get into broadband, but realized the phone companies were subject to forced resale at regulated prices. So they got into cable instead. Both cable and the telcos had the same incentive to upgrade their networks, but not the same ability. Investors penalized the phone companies with a higher cost of capital while rewarding the cable companies with a lower one. The cable companies got to invest almost $100 billion upgrading their networks. The FCC has now ruled that phone companies needn’t share DSL and fiber with competitors. As a result, AT&T and Verizon are spending billions trying to catch up.
The researchers point to Japan, in particular, to buttress their argument that competitive pressure will create incentive sufficient to ensure investment,

The experience in broadband markets around the world support our conclusions. In Japan, for example, fierce competition among broadband service providers has led to the introduction of download bandwidth speeds in excess of 100 Mbps as far back as in 2004 (Yang 2004), with prices for the consumers significantly lower than that in the United States (Turner 2005).

Turner’s report, Broadband Reality Check: The FCC ignores America’s Digital Divide (Aug. 2005) cites Thomas Bleha’s article, “Down to the Wire,” in Foreign Affairs, for the proposition that faster broadband is available at lower prices in Japan. But Bleha reveals a little secret that the advocates of net neutrality regulation choose to ignore: Taxpayers helped finance Japan’s ultrafast fiber connections.

The government used tax breaks, debt guaranties (sic), and partial subsidies. It allowed companies willing to lay fiber to depreciate about one-third of the cost on first-year taxes, and it guaranteed their debt liabilities. These measures were sufficient to ensure that new fiber was laid in cities and large towns, but in rural areas, municipal subsidies were also needed. Towns and villages willing to set up their own ultra-high-speed fiber networks received a government subsidy covering approximately one-third of their costs, so long as those networks, too, were open to outside access.

In other words, there wasn’t enough interest from private investors in Japan and taxpayers had to contribute to the ability of the broadband providers to upgrade.
Aside from this omission, this latest report relies on another erroneous assumption, i.e., that the “absence of meaningful competition in providing broadband access to consumers in many areas of the United States makes the broadband service provider a de facto monopolist.” There is effective competition in most areas of the U.S. Most consumers can choose, at a minimum, between the broadband offerings of their local cable and telephone companies, while various wireless offerings are becoming more ubiquitous. Numerous reports in the national media comfirm that the cable and phone companies are competing vigorously on bandwidth, features and pricing.
What about consumers? Without net neutrality regulation, either consumers as a whole will be no worse off than they are now or a majority of consumers will be better off.

Depending on parameter values in our framework, consumer surplus either does not change or is higher, and in the latter case, while a majority of consumers are better off, a minority of them is left worse off with larger wait times to access their preferred content.

See: The Debate on Net Neutrality: A Policy Perspective, by Hsing Kenneth Cheng, Subhajyoti Bandyopadhyay and Hong Guo (2007)

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.