Price discrimination with congestion effects

I examine a model of price discrimination with congestion and find that when service providers are allowed to sell priority access to networks, consumers are made better off in most cases. In particular, profit is greatest when priority access is sold to a low value consumer, though high value consumers have a higher willingness to pay for priority when both consumers are served. Selling a priority right makes it profitable to serve all consumers in all sections of the parameter space. This result is robust to both single price monopoly pricing and third degree price discrimination. When no priority is offered, greater flexibility in pricing leads to greater profit for the firm, with the highest profit being achieved under fully nonlinear pricing. This analysis has implications for the net neutrality debate, particularly that consumer welfare may be made improved if net neutrality is relaxed.