Net Neutrality and Price Discrimination

Posted by: Stephen Wildstrom on January 10, 2008

In the latest of a series of looks at the economics of the Internet, mathematician Andrew Odlyzko, director of the Digital Technology Center at the University of Minnesota, takes a dispassionate look at the dispute and concludes that while carriers certainly have a strong interest in charging premium prices, it is hard to come up with an economic justification for them doing so.

“[T]here are precedents for telecom companies to ask for ability to charge special fees to companies like Google that might be deriving large profits from the use of the infrastructure.,” Odlyzko writes. “The question is, do they need it? And there is no evidence that they do.” In the end, he believes, some form of net neutrality regulation is likely: “The general conclusion is that some form of government intervention, to set the rules, is inevitable. (And at some point it may be welcomed by the players, just as government intervention was welcomed in the end by the railroads.)”

The paper, "Network Neutrality, Search Neutrality, and the Never-ending Conflict Between Efficiency and Fairness in Markets," is non-technical and well worth reading. It recasts the net neutrality debate largely as an argument over what economists call price discrimination, a difference in prices that reflects a buyer's willingness or ability to pay rather than differences in the cost of providing a good or service. Sellers generally like price discrimination because it leads to higher profit margins; consumers tend to hate it in large part because they are always left with the feeling that someone is getting a better deal than they are.

Odlyzko's bottom-line conclusion, based on an analysis of rates of return and the cost of capital, is that the operators of the Internet backbone don’t need to charge premium rates for the transmission of high-quality media. In large part, that's because the ungraded networks required will actually cost less than the book value of the systems they are replacing.

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Reader Comments

Allen

January 13, 2008 08:48 PM

They way I would phrase it is that as a consumer I want to be able to pay a premium to ensure quality and reliability for certain services I use. FOr exmample, can one imagine how much better Netflix's view now video could be if they could guarantee data packets arriving in a timely fashion? Or how much better might my calls on Skype sound if I were able to do the same? We need to remember that not differentiating traffic hurts consumers in many ways.

Joshua

January 16, 2008 12:48 PM

It's just another way big corporations are trying to take control of everything: from the channels we watch, to the websites we visit. It's one thing to charge customers for the quality/speed of the internet. It's an entirely different thing to force web businesses to pay up in order for people to view content. This will ultimately lead to information censorship where the corporation can choose to provide lower prices to those websites or companies who share their same view. If you pay for internet service, you pay to get any content you want from the internet. They should not tell me what I can visit on the internet I pay for.

AC

January 16, 2008 01:06 PM

In effect, this is an attempt to blackmail Google for their successes, or force Google into buying shares of the bandwidth providers. There's no bandwidth crunch.. not with 90% of the fiber laid in the 90's still being "dark".

These cartel tactics are why the US is falling behind in broadband use (98% in Korea vs 45% in the US), why the US gets 'new' cellphones 3 years after their debut elsewhere, and why the innovation is elsewhere now. The government and corporations realize this and are in a race to suck the US consumer dry, while their credit is not yet maxed out.

realizePhiladelphia

October 19, 2008 05:37 PM

If Net Neutrality goes into effect, the internet will change for everyone! Learn more at web.illish.us

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