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The Repeal Of Net Neutrality Has Its Pros And Cons

Dec 25, 2017

Commentary: Repeal of net neutrality will allow internet service providers to charge different content providers different prices. This will enable service providers to use their monopoly power to structure fees to their advantage. More profit for the service providers, less for the content providers.

Many claims have been made on both sides of the issue, and most of these claims are valid. For example, the pro-net neutrality people argue that repeal with tip the scales in favor of internet service providers and that prices higher costs faced by content providers, like Net Flix, will reduce investment and stifle innovation. This is true.

Opponents of net neutrality argue that repeal will increase investment into internet access and will promote competition. This is also true.

Indeed, the goal of the internet access providers will be to set prices so as to transfer all profits from the content providers to themselves. The access providers will be able to use their detailed information about downloads and streaming to make this profit transfer very efficient.

Higher provider profits will draw investment in to the industry. A key question for consumers is whether this investment will take the form of expansion by existing firms or entry by new firms. If the latter, we will see more competition and lower prices.

The ultimate outcome will depend on the cost structure. So far, the high fixed costs of internet access have served to protect incumbent providers from competition. Advocates of net neutrality repeal argue that the higher profits after repeal will be sufficient to overcome fixed costs, thus, will promote competition. They may be right, but they could be wrong. Evaluating this assertion ahead of time is very difficult, which is one of the reasons why repeal is so controversial.

The increased profitability of the internet access providers comes at the expense of the content providers. And Content providers will try to pass on their higher costs to consumers. Whether they succeed in so doing is unclear.

Competition among content providers is much more intense than among internet access providers. If content firms can’t pass on their cost, we will likely see exit. Consumers will have fewer content choices and in the end, those choices will cost more.

Will repeal make consumers as a group better or worse off? It is hard to say. Less content bad, improved internet access good, higher prices bad.

If provision of internet access where a competitive industry, real repeal of net neutrality would be no big deal. The disadvantage content providers would simply defect to a competitor. Competition would force internet access to be priced at its cost.

Of course, most markets, including Las Cruces, have only a few internet access providers. However, the price-equals-cost outcome doesn’t take that much competition. Under the right conditions, just two competitors are sufficient. And most markets have that. So maybe net neutrality wouldn’t turn out to be that big a deal.

Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. He has taught economics for 35 years, 30 of those at NMSU. The opinions expressed may not be shared by the regents and administration of NMSU. Chris can be reached at chrerick@nmsu.edu