Effects of Vertical Integration on Internet Service Providers' Zero-rating Choice

This study investigates the effects of vertical integration between an Internet service provider (ISP) and a content provider (CP) on the ISP's zero-rating choice and social welfare. We develop a simple model where a monopolistic ISP delivers content from two CPs to a representative consumer. The ISP can offer zero-rating contracts to one or two CPs, allowing the consumer to use zero-rated content without consuming monthly data usage. We investigate how the integration between the ISP and a CP impacts the ISP's zero-rating choice and social welfare. Our findings are as follows. First, the vertically integrated ISP may zero-rate the unaffiliated CP exclusively when the CPs' profitability is low and the ISP's operating cost is high. Second, the integration decreases the total surplus when the CP's profitability is sufficiently low; otherwise, it improves the total surplus. Our results indicate that a vertical integration and zero-rating could be both welfare-enhancing and reducing.