The economics of free Internet access

In an increasing number of European countries, Internet service providers o ffer free Internet access. Telephone companies are willing to pay these pro viders based on the amount of traffic they generate. In this paper, we expl ain these phenomena. We argue that, by offering a contract that pays the pr ovider a certain lump sum conditional on it providing free Internet access, the telephone company solves a double marginalization problem. We analyze this in a simple model in which only the Internet access market is studied, and in a richer model, where the regular telephone market is also taken in to account.