Bilateral negotiations, vertical contracting, and firm behaviors in network
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Zhu, Lian
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Abstract
In the last two decades, the internet industry has changed dramatically, especially for interconnection relationships. With the booming video-streaming services, internet service providers (ISPs) have been trying hard to deliver the enormous data that are needed to support video streaming. As a result, it gradually becomes a huge burden for ISPs, and they want to change the peering relationship from settlement-free peering to paid peering. This creates a widely discussed topic among all parties involved. In the first two chapters of my dissertation, I will discover what happens to end users, content providers, and ISPs if ISPs decide to use paid peering in the settings of two-sided markets. In the first chapter, we will be looking at a two-by-two model where relatively major ISPs will move first then the other will follow. We also allow for re-negotiations and those IPSs can re-consider the details of their contracts after seeing the contracts from others. In the second chapter, we assume that all ISPs move all at once and negotiate once for the optimal contracts. And we don’t allow for re-negotiation here. From the first two chapters, we find that access ISPs will compensate for the traffic in the system, and with Nash Peering relationships more content providers are drawn into the system and social welfare will be increasing; Internet-based companies are growing rapidly in recent decades and video-sharing websites like YouTube or Twitch are also earning huge profits, mainly from advertisement revenue. However, in the last decade, more and more profits are generated through the subscription service, where end-users are offered the option of paying a fixed subscription fee to avoid watching advertisements. For example, from 2015 to 2021, Youtube’s annual subscribers increased from 1.5 million to 50 million, while the total number of its users just doubled. Apparently, subscribers are growing much faster than the total users. These video-sharing companies are conducting second-degree price discrimination since they cannot distinguish different groups of end-users, who choose whether or not to subscribe. Therefore, many people are concerned that these websites will deliberately add more advertisements to the content to push some consumers into paying a subscription fee to avoid watching advertisements. This paper presents a model to study how a monopoly firm chooses the density of advertisements and subscription price and how end-users react to it. I will show that when offering the subscription service, the firm has an incentive to add more advertisements for non-subscribers and hence reduce the quality of the service; non-subscribers will spend less time on the website than they originally did, which results in a welfare loss for all end-users. However, social welfare will increase with the subscription service and this increase will be enlarged if the fee is regulated to be lower than the monopoly price.
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Date
2022-08-03
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Text
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Dissertation