The economic reasoning underlying network neutrality regulationadopted this week by the Federal Communications Commission is fundamentally flawed, according to Professors J. Gregory Sidak and David J. Teece in an article published in the Journal of Competition Law&Economics.

Sidak and Teece explain that the FCC's proposed regulations would have the effect of banning or restricting optional business-to-business transactions between broadband Internet service providers (ISPs) and content providers for enhanced delivery of packets over the Internet.

The proposed "nondiscrimination" rule would have the ironic effect of actively discriminating against any kind of content or application that is differentiated by its need for greater assurance of higher quality transmission across the Internet (known as quality of service, or QoS) than undifferentiated best-effort delivery can offer. This result not only would reduce static efficiency by encouraging higher consumer prices, but also would reduce dynamic efficiency by retarding innovation. 

Sidak is the chairman of Criterion Economics, L.L.C. in Washington, D.C. and the Ronald Coase Professor of Law and Economics at Tilburg University (TILEC) in The Netherlands.   Teece is the chairman and Principal Executive Officer of the Berkeley Research Group LLC and the Thomas W. Tusher Professor in Global Business at the Haas School of Business at the University of California, Berkeley. 

 Citation: J. Gregory Sidak and David Teece, 'Innovation Spillovers and the 'Dirt Road' Fallacy: The Intellectual Bankruptcy of Banning Optional Transactions for Enhanced Delivery Over the Internet', Journal of Competition Law&Economics, Vol. 6, 2010