Should Online Content Providers be Allowed to Subsidize Content? — An Economic Analysis

Abstract

Internet service providers (ISPs) are experimenting with a business model that allows content providers (CPs) to subsidize Internet access for end consumers. In this study, we develop a game-theoretical model to analyze the effects of this sponsorship of consumer data usage. We find that the ISP’s optimal network management choice of data sponsorship crucially depends on market conditions, such as the revenue rates of CPs and the fit cost of consumers. If the fit cost is low, the ISP will either allow both CPs to subsidize consumers’ Internet access, or will allow only the more competitive CP to subsidize, depending on the per-consumer revenue generation rates of CPs. If the fit cost is high, it is in the ISP’s interest not to allow any subsidization. We also identify conditions under which the ISP’s network management choices of data sponsorship deviate from social optimum. These results should be of interest to the telecom industry as it searches additional revenue models, and to online content providers competing for customer loyalty. It should also be of interest to policymakers investigating into this issue.

Keywords: Internet service provider, online content provider, usage subsidization, consumer surplus, social welfare

JEL Classification: L96, C72, D60