The Strategic Use of Download Limits by a Monopoly Platform

Nicholas Economides
Benjamin Hermalin
Publication Type: 
Working Papers
Publication Year: 
2013

The authors consider a heretofore unexplored explanation for why platforms, such as Internet service providers, might impose download limits on content consumers: doing so increases the degree to which those consumers view content providers' products as substitutes. This, in turn, intensifies the competition among providers, generating greater surplus for consumers. A platform, in turn, can capture this increased surplus by charging consumers higher access fees. Even accounting for congestion externalities, we show that a platform will tend to set the download limit at a lower level than would be welfare maximizing; indeed, in some instances, so low that no download limit is welfare superior to the limit the platform would set. Somewhat paradoxically, the authors show that a platform will install more bandwidth when allowed to impose a download limit than when prevented from doing so. Other related phenomena are explored.

JEL Codes: 
L1, D4, L12, L13, C63, D42, D43
Country: 
Global
Topic: 
Two-Sided Markets