The economics of product-line restrictions with an application to the network neutrality debate

We examine the welfare effects of product-line restrictions, such as those called for by some proponents of network neutrality regulation. We consider a platform that brings together households and application providers. We find that restricting a monopoly platform to a single product has the following effects: (a) application providers that would otherwise have purchased a low-quality variant are excluded from the market; (b) applications "in the middle" of the market utilize higher and more efficient qualities; and (c) applications at the top utilize lower and less efficient qualities than otherwise. Total surplus may rise or fall, although the analysis suggests to us that harm to welfare is likely. We also examine a duopoly model and find that the welfare effects are similar. (C) 2007 Elsevier B.V. All rights reserved.