The Law and Economics of Network Neutrality

Thomas W. Hazlett, Professor of Law and Economics and Director, Information Economy Project, George Mason University
Joshua D. Wright, Professor of Law, George Mason University School of Law and Department of Economics

Indiana Law Review, Vol. 45 (2012).

This Paper critiques the FCC’s net neutrality (NN) policy—specifically, the no blocking and no unreasonable discrimination rules. After a short legal analysis evaluating the likelihood that the FCC’s rules are likely to be declared beyond the scope of the agency’s charter in Part I, the Paper focuses on the economic impact of net neutrality regulations. In Part II, the Paper explains the regulatory status of the Internet. It is beyond paradoxical that the FCC argues that it is imposing new regulations to preserve the Internet’s current economic structure; a structure that has developed, thus far, in an unregulated environment where firms are free to experiment with business models—and vertical integration—at will. Part III explores the widespread use of “non-neutral” business forms by ISPs, Internet backbone providers, and application developers. Far from the Internet being an architectural construction, the network of networks is an evolving ecosystem in which key linkages between the “transport layer” and the “content/application layer” are efficiently deployed, advancing innovation, serving consumers, and driving Internet growth. “Walled gardens” are an essential part of the Internet and exist (in varying forms) throughout the market. Part IV lays out the economic problem that the NN rules aim to counter: anticompetitive foreclosure. Actions by firms resulting in this outcome are already illegal under the antitrust laws, where the “rule of reason” is employed to separate socially beneficial practices from those that are harmful. NN goes far further than existing law, categorically prohibiting various forms of economic integration in a manner equivalent to antitrust’s per se rule, properly reserved for conduct that is so likely to cause competitive harm that the marginal benefit of a fact-intensive analysis cannot be justified. In this case, the NN Order bans conduct that is typically highly efficient, promoting investment and innovation, as has been demonstrated in the Internet space repeatedly. While the FCC purports to examine instances to the contrary, neither the economic literature concerning vertical contracting practices,such as those banned by the NN Order, nor the FCC’s collection of anecdotal allegations of anticompetitive foreclosure
can withstand scrutiny. Latter parts of this Paper explain the weaknesses in the FCC’s economic arguments that allegedly show anticompetitive foreclosure.

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