Net Neutrality in Economic Terms: Mall Neutrality

For a moment, think of the Internet like a giant shopping mall. The proprietor of this mall would be an ISP. There are only a few mall proprietors in any given city and some cities have one mall. The proprietors are wealthy, but that’s because building a mall isn’t cheap. It’s unlikely any one person could obtain the capital resources to do so.

When you go in a mall, there are hundreds of stores (content providers) of different sizes and with different products. Macy’s has a larger footprint than Gap, and Gap is larger than the mall kiosks. This is not because mall proprietors offer Macy’s special treatment, but rather Macy’s has more traffic and needs for space, or fast lanes. Macy’s has more traffic because of the consumer demand volume created through a successful business model.

Thus, it is beneficial to the consumer AND proprietor if Macy’s has the footprint to accommodate the extra traffic. Keep in mind, Macy’s also pays a premium for that, but it’s worth it to generate a return. Macy’s also enjoys larger signage for its stores, including navigational, or “fast lanes” in Internet terms.

Gap and the kiosk would not pay the additional cost since their demand wouldn’t meet the added capacity. Nor would the proprietor charge them extra for a lack of traffic because he would lose tenants entirely, which is worse than lower paying tenants. This does NOT mean Gap and kiosk aren’t profitable.

Macy’s and the proprietor are not colluding in a manner that would reduce customer satisfaction. The mere presence of smaller stores, such as Gap and kiosk, keeps Macy’s in check through competitive forces. If Macy’s were to raise prices, customers would go to Gap. Over time, Gap would take over Macy’s retail space.

Furthermore, the proprietor of the mall has no incentive to give Macy’s special treatment above what their consumer demand levels require. Why? For one, Macy’s would experience diminishing returns. The more space Macy’s consumes above their demand, the hire its respective operating costs increase. Macy’s couldn’t necessarily generate the revenue to cover those costs, so the proprietor could lose rent. In the end, both parties could lose out significantly.

If we apply the concept of Net Neutrality, things quickly turn for the worse. Macy’s now has to reduce their footprint, in spite of higher demand, until it is “fair” and equal to that of Gap and the kiosk. Obviously, Macy’s cannot fit their entire inventory into a Gap store. CUSTOMERS experience a loss in QUALITY due to a now limited selection, or a slower website.

Since Gap and the kiosk have arbitrarily larger stores, they will be paying MORE IN RENT, but still not be able to generate the revenue to cover the added cost. Consumer demand has not changed, nor is there any indication that it would. It is likely that all three enterprises would raise prices to cover losses and additional costs from the new policy.

Macy’s would lose profit in the short term. Ultimately, due to their capital structure, they would rebound through innovation and probably not feel much pain. Their consumers would experience a greater loss. Gap and the kiosk would experience NO NET GAIN because their demand has not changed at all. The mall proprietor would not experience any change because the SAME LEVEL of square footage exists. In the end, the consumer is the ONLY party that experiences a loss.

Put simply, just because you “even the playing field” does not mean the game will be any better. The competitive forces of a market keep everyone in check. This basic economic principle is ESPECIALLY true when substitutes are readily available in a close proximity marketplace, such as in malls and on the Internet.

 

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