December, 2016

The Fable of the Packets: A New Institutional/Market Process Approach to Network Neutrality

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On February 26, 2015, the Federal Communications Commission (FCC) voted to adopt the 2015 Open Internet Order enforcing “network neutrality,” the principle that all data packets traveling across a network must be treated equally by broadband providers in the United States. This paper uses market process theory and new institutional economics to examine the justifications for and effects of the FCC’s network neutrality regulations. The analysis shows that the regulations will, in fact, negatively affect entrepreneurship in broadband and content provision in the United States and ultimately harm consumer welfare. I discuss the history of the network neutrality debate and basic technical realities of network management, and review theories of the market process and entrepreneurship and how they apply to the US broadband industry. The main drivers of the network neutrality debate are the various frictions and disputes between broadband providers and internet content providers. I use new institutional economics to discuss how broadband providers and content providers can resolve these frictions and disputes through private, vertical arrangements, including nonneutral network management practices. I review some case studies of nonneutral network management covering each of the four practices that the 2015 Open Internet Order bans or limits, examining the entrepreneurial actions taken by broadband providers and content providers alike to resolve disputes. I contrast the “precautionary principle” approach to network neutrality that is embodied in the 2015 Open Internet Order with a “permissionless innovation” approach to regulation, whereby regulators must prove that particular instances of nonneutral network management are both harmful and not ancillary to a legitimate network management or business practice.