Friday, October 19, 2012

Are Price Controls Good for Broadband?

The Federal Communications Commission recently has started looking at re-regulating special access tariffs, possibly leading to new price controls for those products. To be sure, buyers of special access might like that. Sellers will not. To be sure, special access is a business-to-business product. But some would say pressures have been mounting in the consumer services arena as well.

Objections to usage caps and metered consumption provide examples of what some call . “inherently anti-consumer” or “anticompetitive” practices.

Actually,  “by aligning costs more closely with use, usage-based pricing may effectively shift more network costs onto those consumers who use the network the most,” argues Daniel A. Lyons in  “The Impact of Data Caps and Other Forms of Usage-Based Pricing for Broadband Access,” Lyons, an assistant professor of law at Boston College Law School, argues that a return to price controls for communications would be monumentally misguided.

Data caps and usage-based pricing are forms of what economists refer to as “price discrimination, that term being used in an objective sense of “difference, not invidious difference.”

Price discrimination is a mainstay of the travel industry, where airlines and hotels know some potential customers will pay more, while some can be enticed to spend only if prices are lower. Price discrimination is the process of charging different prices to different customers.

At first blush, it  sounds wrong. But it is really a concept at the heart of value-based pricing. For example, travellers who won’t endure an overnight Saturday stay are presumed to be travelling on business, charging the ticket to someone else, and therefore are less price-sensitive. So itineraries with Saturday stays are often much cheaper than those without.

Although viewed with suspicion by some policymakers and regulatory-minded academics and activists, price discrimination is widely recognized to improve consumer welfare by calibrating supply and demand, Lyons says.

Price-differentiated and prioritized services also are seen in prioritized shipping services, amusement park passes, and fuel and energy pricing. Economists agree that price discrimination represents a sensible way to calibrate supply and demand while ensuring the fixed costs of doing business get covered.

The Mercatus-published study argues that consumers benefit from such pricing because they have more options.

But service providers also gain more certainty about investment and service decisions. When such pricing practices become annoying to some consumers and they show a clear desire for alternatives, it sends a signal to rivals to offer a differentiated service.

With a high fixed cost problem to deal with, it is unsurprising that broadband providers have started experimenting with new pricing methods to balance the exploding demand for Internet services with the need to cover ongoing network investment.

“If we want to reap the benefits of new and innovative tech products, we must be prepared to accept price discrimination at least some of the time,” says researcher Eli Dourado of the Mercatus Center.

“There are products that are viable with price discrimination that are not viable without it—and if we ban price discrimination like some people thoughtlessly advocate, we won’t get them,” says Dourado.

This is precisely why experimentation with different pricing methods and business models must be allowed to continue if we hope to ensure ongoing investment in new networks and better services, under circumstances where the government simply cannot finance the networks.

Christopher Yoo argues that “private corporations cannot be expected to undertake such investments unless they have a reasonable prospect of recovering their upfront costs from consumers who are using the increased bandwidth and other enhancements to the existing network.”

Yoo points out that price discrimination can help solve this problem, primarily by ensuring that heavier users cover the costs they impose on networks.

Sandvine estimated last year that the heaviest one percent of downstream users account for 15.2 percent of total North American fixed downstream broadband traffic, while the heaviest one percent  of upstream users account for almost 43 percent of total upstream use. By comparison, the lightest 60 percent of consumers account for only 10% of total North American fixed broadband traffic.

About one percent of mobile data users consume 26.8 percent of upstream usage, while consuming 21.3 percent of downstream mobile traffic. By comparison, the bottom 80 percent of users account for only 10 percent of total traffic combined.

By pricing those users differently than others, costs can be more fairly covered and demand balanced over time. In turn, says Lyons, “usage-based pricing may also make entry-level broadband access more affordable” since providers can offer lower rates to light or low-income users.

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