The Welfare Impacts of Broadband Network Management: Can Broadband Service Providers Be Trusted?

Abstract

The extent to which broadband Internet service providers can engage in reasonable traffic management when faced with potentially congestion-causing applications like BitTorrent or other file-sharing applications is currently the subject of heated debate. This Paper provides a formal economic analysis of the likely welfare consequences of broadband Internet network management that is directed at controlling network congestion. We show that it is socially desirable to charge a congestion premium or utilize other traffic management techniques when congestion-causing applications impose a congestion externality and degrade the experience of other users. The most efficient traffic management actions would be targeted at applications that cause congestion externalities and not upon all applications generally. The model also suggests congestion externalities caused by applications may vary depending upon network capacity constraints and protocols. As a result, assessment of the reasonableness of network management practices is most logical on a case-by-case basis rather than imposition of a single bright-line test. Instead, our model indicates that if it is shown that a congestion externality is present and that a traffic management tool directly remedies that externality, it is appropriate to presume that this type of traffic management by a private firm is legitimate and welfare enhancing.

Keywords: network neutrality, congestion, externalities, reasonable network management

JEL Classification: K23, L21, L22, L51, L52, L96, O31, O38