Net Neutrality, Network Capacity, and Innovation at the Edges

We study how net neutrality regulations affect a high-bandwidth content provider (CP)'s investment incentives to enhance its quality of services (QoS) in content delivery to end users. We find that the effects crucially depend on whether the CP's entry decision is constrained by the Internet service provider (ISP)'s network capacity. If capacity is relatively large, prioritized services reduce the QoS investment as they become substitutes,
but improve traffic management. With limited capacity, by contrast, prioritized delivery services are complementary to the CP's investments and can facilitate entry of congestion sensitive
content; however, this creates more congestion for other existing content. Our analysis suggests that the optimal policy may call for potentially asymmetric regulations across mobile and fixed networks.