By Pio Baake and Slobodan Sudaric
In November 2015 the European Union passed regulation on open internet access providing a legislative answer to the European side of the ongoing debate on "network neutrality" - a concept that broadly requires that all traffic should be treated equally. This regulation was accompanied in August 2016 by guidelines set up by the Body of European Regulators for Electronic Communications (BEREC) which provide a framework for national regulators on how to execute the regulation in domestic markets. While neutral treatment of internet traffic is a central pillar of the new regulation, internet service providers (ISP) may still offer differentiated Quality-of-Service (QoS) to content providers (CPs) under certain conditions.
In a recent study, BCCP fellows Pio Baake and Slobodan Sudaric focus on the QoS practice of "paid prioritization" and analyze how prioritization affects competition and interconnection between ISPs. They show that prioritization increases the average traffic quality and intensifies competition for consumers which leaves consumers as the main beneficiaries from prioritization.
These results are based on a theoretical model with two symmetric ISPs connecting CPs as well as consumers to their networks. Quality of traffic is determined within a queueinq model allowing for congestion and prioritization. The ISPs can offer two quality classes: A "priority lane" which is associated with higher quality and a "non-priority" lane with lower quality but free of charge. Regarding traffic across networks, the ISPs are free to charge each other interconnection charges for handling traffic dedicated to consumers connected to their own network.
Prioritization leads to an overall more efficient use of the network as CPs with more quality sensitive applications will opt for prioritization. Furthermore, interconnection charges create an additional revenue stream for ISPs incentivizing networks to increase incoming traffic by attracting consumers. Since this intensifies competition on the consumer side, it is optimal for ISPs to set interconnection charges equal to zero. Prioritized interconnection is therefore unlikely to affect existing peering agreements between networks. Finally, the possibility to offer different service classes increases the ISPs’ investment incentives which leads to higher network capacities and enhances the traffic quality even further. These results therefore suggest that a total ban of QoS differentiation would have detrimental effects.
Read the full DIW Discussion Paper 1629 here.