Testing the virtuous circle of innovation: Does it increase broadband investment? A preliminary discussion


The theory of the “virtuous circle of innovation” is an argument proffered in support of network neutrality. The virtuous circle is the notion that the growth of content and applications stimulates demand for internet subscriptions which generates revenue for operators which then invest in infrastructure. This argument was first introduced by the the Federal Communications Commission, the telecom regulator of the United States, in its Open Internet Report & Order of 2010. Subsequently it was presented in a brief by the Open Internet Coalition and another by a group of engineers as part of the case Verizon v. FCC. In its decision for the case, the District Court of Appeals of Washington, D.C. mentioned the virtuous circle. Earlier game theoretical work by Cheng, Bandyopadhyay and Guo (2008) and Choi and Kim (2010) provide implicit support this assertion, that by requiring broadband providers to treat all data equally will encourage them to invest in broadband infrastructure.

This paper offers a review of the design of an empirical test of this theory. More specifically it tests one suggestion of the theory. The test, an econometric model built with empirical data from a variety of countries (US, Chile, Peru, Netherlands, Brazil, Slovenia, France, and the Nordic countries), attempts to determine whether the imposition of net neutrality rules increases the network investment. The test is not yet complete, but its design is presented to highlight the many issues and challenges in developing empirical models to support net neutrality policymaking. The test and its outcome will likely be imperfect, but a discussion of the design of the test can be helpful to highlight questions and assumptions that underlie net neutrality.