QoS Investment, Vertical Integration and Regulation of the Internet

Abstract : This chapter provides a simple theoretical framework to analyze optimal provision of quality-of-service of the internet by a monopolistic internet service provider (ISP) in the presence of vertical integration. There are two vertically differentiated content providers (CPs), and one of them is integrated with the ISP. The competing CP can access to the internet at free of charge. If left unregulated, the profit-maximizing ISP could provide positive levels of quality to both CPs due to perfect complementarity of internet and content. Especially, if quality provided by the affiliated content is sufficiently low, the integrated ISP offers relatively higher quality of internet service to the competing CP. In addition, this chapter identifies a market configuration in which non-discriminatory quality regulation might be welfare improving.