Network Neutrality, Product Differentiation, and Social Welfare

NETWORK NEUTRALITY, PRODUCT DIFFERENTIATION, AND SOCIAL WELFARE
[SOURCE: Trevor R. Roycroft, Ph.D.]
A recent addition to the argument that network neutrality can undermine last-mile broadband competition is a Phoenix Center Policy Paper by George S. Ford, Thomas M. Koutsky and Lawrence J. Spiwak titled “Network Neutrality and Industry Structure." The major policy recommendation offered by Ford et al. is that policymakers “should avoid network neutrality mandates that have the intent or effect of ‘commoditizing’ broadband access services since such a policy approach is likely to deter facilities-based competition, reduce the expansion and deployment of advanced communications networks, and increase prices.” There are four fatal flaws in the Ford et al analysis, each of which completely undermines their conclusion that policy makers may harm social welfare by pursuing a policy of network neutrality. Specifically, Ford et al.’s policy recommendation is unsupported as their economic analysis fails to address substantial scale economies and sunk costs associated with the provision of last-mile broadband networks, assumes that policy makers could totally eliminate network differentiation, and also ignores the negative impact that abandoning network neutrality principles will have on competition for Internet content, services, and applications. Ford et al.’s conclusions are not supported by their economic model or economic theory.
http://www.roycroftconsulting.org/response_to_Ford.pdf