Introduction

In May 2017, under the conservative Chairman Ajit Pai’s leadership, the Federal Communication Commission (FCC) proposed to roll back the recently-approved net neutrality regulations. Net neutrality advocates for equality in Internet services, under its principle, all Internet Service Providers (ISPs) should treat consumers equally. Experts holding different opinions vehemently argued against each other and made it the most talked about topic on network regulation. To fully understand how this story developed, we must go back to 2015 when the Commission was under liberal’s leadership.

The FCC, formed by the Communications Act of 1934, is responsible for overseeing and ensuring that all citizens in the United States have equal access to communication regardless their race, sex, religion and so on. Its objective is to:

• Promote competition, innovation and investment in broadband services and facilities
• Support the nation’s economy by ensuring an appropriate competitive framework for the unfolding of the communications revolution
• Encourage the highest and best use of spectrum domestically and internationally
• Revise media regulations so that new technologies flourish alongside diversity and localism
• Provide leadership in strengthening the defense of the nation’s communications infrastructure

The Story

In 2015, a furious battle broke out between Internet Service Providers (ISPs) and Internet content providers after the democratically guided FCC proposed their new rule to enforce network neutrality regulation. The rule, to summarize, was to prevent ISPs from blocking any lawful content and applications or services, slowing down streaming speed of any applications or services and using any Internet fast lanes strategies.

Supporters of this new rule were Internet content providers like Google, Youtube, Netflix who provide entertainments and services which are incredibly popular and can attract tremendous visits. While the opponents of this rule were ISPs like Comcast, Verizon and AT&T who have, up until that point, had total control of broadband provisions and were able to adjust their Internet speed at will. The relationship between ISPs and Internet content providers is analogous to the relationship between a car manufacturing monopoly and the dealers. The car manufacturer controls the production of goods (upstream) while the car dealers sell cars to customers directly (downstream). The content providers urged the rule to be passed since they desperately found themselves vulnerable to the upstream firms believing that ISPs were pricing them differently. Meanwhile, the ISPs argued that the rule can indicate other stricter regulations in the future which could cause them heavy economic losses.

This was not the first time the FCC tried to set regulations on net neutrality. A previous attempt at a similar regulation in 2010 was rejected by the D.C Circuit which stated that the FCC had no regulatory power over ISPs. In response, the commission finally proposed two potential remedies, it could reclassify ISPs as common carriers which would guarantee the FCC’s power over them, or it could allow ISPs to use price prioritization in which case they were able to charge different Internet users by different willingness to pay. Ultimately, with former president Obama stepping in, the commission reclassified ISPs as common carriers so that the network providers were forced to abide by the new regulations.

Conclusion

From an economic perspective, Internet service providers are the upstream firms in a vertically disintegrated market. Their downstream counterparts are the content providers who provide services to consumers. Due to the high fixed cost of investment in Internet infrastructures like signal towers and cable lines, ISPs can be defined as oligopolistic firms who have huge market power and face less competition. Hence, they have more freedom in setting their pricing and output strategies compared to firms in perfect competitive markets. On the other hand, consumers in this type of market structure are more vulnerable since they tend to suffer more because of fewer choices. Going back to the recent decision president Pai had made, rolling back net neutrality regulation would only benefit the ISPs in the upstream. If they started to charge their rates differently, the consumers would ultimately get hurt. Meanwhile, it can also be the case that, without the rule, the industry could reach a more efficient state. If we assume that services are the same under the regulation, everyone receives same speed with same price. We have to admit that there still will be people who wish to have the prioritization services to surf faster since consumers have various willingness and budget to spend on Internet services. Hence, having different pricing strategies can also possibly be socially benefitted if we treat customers and firms as a whole. Due to dearth of research that examines the total industry change without the rule, the FCC needs to conduct more of these studies if they want to prove that its current decision can bring positive social welfare.