An Economic Evaluation of Alternative Mechanisms for Regulating the Internet

This paper utilizes an economic approach to analyze the strategic pricing behavior of the Internet service providers (ISPs). The objective is to provide policy recommendations and guidelines for governance of the Internet and to provide insights regarding optimal policies which should be implemented to govern the Internet in order to maximize the net social welfare. The recommendation which emerges from the analysis is that the optimal method for regulating the information superhighway is to implement a usage-based pricing mechanism which will force users of the network resources to pay for their usage of these resources depending on the extent to which they consume the resources. The best method of enforcing such a pricing mechanism is by means of a tax on the usage of Internet connectivity by the users. The analysis predicts that there will be a shakeout in the Internet Service Provider (ISP) market with many small ISPs being acquired by the larger ISPs. A third prediction which emerges from the model is that the free-riders who try to utilize Internet bandwidth without contributing to the expansion of the Internet backbone will be forced out of business