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 in content delivery to end users. We find that the effects crucially depend on whether the CP's entry is constrained by the Internet service provider's network capacity. If the capacity is relatively large, the prioritization reduces the investment as CP's investment and prioritization form substitutes. With limited capacity, however, they become complements and the prioritization can facilitate the entry of congestion-sensitive content. Our analysis suggests that the optimal policy may call for potentially asymmetric regulations across mobile and fixed networks.