Tuesday, January 28, 2014

net neutrality and price discrimination

There is a misconception about net neutrality amongst the tech community. People cringe at the idea of essentially offering different prices for the same services and hence advocates want "net neutrality" or the ability to access everything on the internet for the same price.

Yet charging different prices is called price discrimination by economists, and for the most part, economists love price discrimination because it tends to make the market more efficient, and in the end, better for consumers.

The classic example of this is the market for airline tickets. Yes, it feels deeply unfair and arbitrary how prices for plane tickets vary by seat to seat, and minute to minute. Yet, the reasons for this is so that on average, this system allows the airline to charge low prices to low demand customers like tourists, and high prices to high demand customers like businesses.

If we imposed a "neutrality" rule that required airlines to charge the same price to everyone, that would force the airlines to charge an intermediate price. Businesses would see their prices go down, but everyday people like tourists would see their prices go up. And the loss of efficiency would lead to fewer airlines and fewer flights for everyone.Advocates of simple pricing are helping businesses at the expense of tourists.

Another example is the market for higher education, where financial aid allows universities to charge high prices to rich parents--to price discriminate--so that they can afford to charge low prices to the underprivileged. Those who want lower sticker prices for universities are only helping rich parents at the expense of the poor.

Net neutrality is the same. Allowing carriers to charge different prices for different content allows carriers to expand the range of services they offer to different demand levels. Prices will go up for some but prices will go down for others. The amount of shenanigans networks can try is constrained by the ability of consumers to turn off or switch away. Yes, living in New York, I understand that many people have little choice when it comes to internet carriers, but still if Time Warner doubled their prices, I would likely cancel service.

There are legitimate concerns about the impact of such contracts on monopolization. But there has been too little discussion about whether these rulings that end net neutrality will have big effects on competition. One need only look at the fierce competition amongst mobile networks which never had to abide by net neutrality rules for one example where competition lives on.

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