The effects of contractual relationships on investment incentives in complementary goods market

Official URL: http://192.168.1.20/record=b1266181 (Table of Contents)

This paper tries to suggest some solutions to the debate on net neutrality where content providers and access providers in tandem produce a composite good; Internet service. Both content providers and excess providers contribute to their own component's quality and the quality that the internet users conceive depends on both components' qualities. In our model, this debate is generalized to complementary goods market where final goods are composite goods comprising two components. The producers of the components contribute to the quality of their components where the value of the composite good is determined with a function of the qualities of components. We assumed; one firm's benefit per consumer is a exogenous constant, and the other gets benefit from pricing consumers for the final good. In the model, we investigate how introducing a price mechanism between the firms effects their investment decisions. We found out that the optimal solution for net neutrality debate can be found by examining how the qualities of components are related to each other on determining the quality of internet service. If the qualities are more close to being complementary to each other, a positive price between the content providers and access providers is welfare improving.