Regulating Monopolistic ISPS without Neutrality

Net neutrality has been heavily debated as a potential Internet regulation. Advocates have expressed concerns about the pricing power of ISPs, which might be used to discriminate Content Providers (CPs), and consequently destroy innovations at the edge of the Internet and hurt the user welfare. However, without service differentiation, ISPs do not have incentives to expand infrastructure capacities and provide quality of services, which will eventually impair the future Internet. Although competition among ISPs would alleviate the problem and reduce the need for regulations, the problem is more severe in monopolistic markets. We study the service differentiation offered by a monopolistic ISP and find that its profit-optimal strategy makes an ordinary service "damaged good", which hurts the welfare of CPs. Instead of imposing net neutrality regulations, we propose a flexible and lenient policy framework that generalizes net neutrality regulations. We find that a stringent regulation is needed when 1) the ISP\´s capacity is abundant, 2) the profit distribution of CPs is concentrated, or 3) the utility of CPs and their users are not positively correlated. We believe that by allowing the ISPs to differentiate services under a well designed policy constraint, the utility of the Internet ecosystem could be greatly improved.