Net neutrality and regulation on the internet access

We analyze the welfare implication of net neutrality that regulates the price of the last-mile access to consumers provided by local Internet service providers (ISPs). The model highlights a vertical relationship between local ISPs and large content providers, called Content Network Platforms (CNPs), who serve as intermediaries between consumers and content providers (CPs). The welfare implication of regulation on Internet-access termination fee depends on the relationship between ISPs and CNPs and its impact on consumer demand for the Internet. Regulation improves welfare if no platform has dominance. If ISPs have a dominant factor in determining the consumer demand, net neutrality improves welfare for a sufficiently price-responsive demand. However, if CNPs hold a dominant factor to determine the consumer demand, regulation strengthens CNPs’ market power and a significant increase in network externality is needed to improve welfare.