Vertical Integration and Zero-Rating Interplay: An Economic Analysis of Ad-Supported and Ad-Free Digital Content
Authors: Cho, Soohyun; Qiu, Liangfei; Bandyopadhyay, Subhajyoti
Journal: Journal of Management Information Systems (2020)
DOI: 10.1080/07421222.2020.1831769
We discuss the economic impacts of the interplay between vertical integration and zero-rating for digital content. To this end, we develop a game-theoretic model that involves an Internet Service Provider (ISP), two competing content providers (CPs)—one an adsupported CP, the other ad-free—and consumers. While previous studies have separately examined vertical integration and zerorated content, none to our knowledge has explored the simultaneous interaction of both phenomena, which became apparent after the historic merger of AT&T and Time Warner. This vertical integration of an ISP and a CP has sparked an intense debate among policymakers and practitioners alike over the economic implications and consequent business practices (e.g., zero-rated content). The results of our analysis show that an ISP can generate higher profits after the merger with zero-rated content. Surprisingly, we find that the consumer valuation of the ad-free content significantly afects how the ISP will decide to maximize its profit. We extend our model to additionally consider the CPs’ partial sponsorship of their consumers’ data usage as well as the ISP’s diferent pricing schemes for its consumers and the…