The paper develops an economic framework for network neutrality regulation. Network neutrality rules forbid network operators to discriminate against third-party applications, content or portals or to exclude them from their network.
The analysis shows that calls for network neutrality regulation are justified: In the absence of network neutrality regulation, there is a real threat that network providers will discriminate against independent producers of applications, content or portals or exclude them from their network. This threat reduces the amount of innovation in the markets for applications, content and portals at significant costs to society.
While network neutrality rules remove this threat, they are not without costs. Due to the potentially enormous benefits of application-level innovation for economic growth, however, increasing the amount of application-level innovation through network neutrality regulation is more important than the costs associated with it.
Apart from advancing the debate over network neutrality, the paper highlights important limitations of the 'one monopoly rent' argument: It shows that there are more exceptions to the 'one monopoly rent' argument than have previously been identified and that these new exceptions may be quite common in the Internet context. It shows that exclusion may be a profitable strategy, even if the excluding actor does not manage to drive its competitors from the complementary market. It also shows that competition in the primary market may not always be sufficient to remove the ability and incentive to engage in exclusionary conduct.