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Perspectives from FSF Scholars            November 16, 2012        
Vol. 7, No. 32   
 

Why Broadband Pricing Freedom Is Good For Consumers

 

by

 

Daniel A. Lyons *

 

[Below is a short summary of this latest FSF Perspectives. A PDF version of the complete Perspectives, with footnotes, is here.]

 

 

Usage-based pricing has rapidly become one of the most high-profile topics in Internet policy. In the past few years, many broadband providers have migrated from all-you-can-eat flat-rate pricing to consumption-based pricing models such as tiered service plans or data caps. This trend has been most prominent in the wireless sector, where monthly limits were an almost inevitable solution to the surge in bandwidth demand unleashed by the smartphone revolution. Some fixed broadband providers have adopted much larger data caps for residential broadband use as well.

 

While regulators have generally approved this shift, some consumer groups have viewed the change with skepticism. They fear that usage-based pricing will usher in an era of higher prices, deteriorating service, and increasingly anticompetitive conduct. They are concerned that pricing tiers or data caps serve as anticompetitive tools with which broadband providers can protect their legacy cable affiliates from upstarts such as Netflix and Hulu. They also fear that firms will use capacity constraints to create artificial scarcity and pad profits while avoiding necessary network upgrades. These critics may have found a sympathetic ear at the Department of Justice, which has begun investigating whether data caps violate antitrust law.

 

These concerns are largely misplaced. Usage-based pricing plans such as tiered service or data caps are not inherently anti-consumer or anticompetitive. Rather, they reflect different pricing strategies through which a broadband company may recover its costs from its customer base and fund future infrastructure investment. By aligning costs more closely with actual consumption, usage-based pricing may effectively shift more network costs onto those customers who use the network the most. Companies can thus avoid forcing light Internet users to subsidize the data-heavy habits of online gamers, movie "torrenters," and the like. Usage-based pricing may also help alleviate network congestion by encouraging customers, content providers, and network operators to use broadband more efficiently.

 

Consumption-based pricing strategies are ways that broadband companies can distinguish themselves from one another to achieve a competitive advantage in the marketplace. Only through experimentation and empirical measurement will providers find the optimal pricing solution - which may vary dramatically from network operator to network operator. Thus far, regulators have correctly rejected the call to interfere with this pricing flexibility absent a showing of market failure and consumer harm.

 

It is possible that data caps or other forms of usage-sensitive pricing can be anticompetitive, but only if a firm with market power exploits that power in a way that harms consumers. Absent a specific market failure, which critics have not yet shown, broadband providers should be free to experiment with usage-based pricing and other pricing strategies as tools in their arsenal to meet rising broadband demand. Public policies allowing providers the freedom to experiment best preserve and promote the spirit of innovation that has characterized the Internet since its inception and which has served consumers so well.

 

* Daniel A. Lyons, an Assistant Professor of Law at Boston College Law School, is a member of the Free State Foundation's Board of Academic Advisors. The Free State Foundation is a nonpartisan, Section 501(c)(3) free market-oriented think tank located in Rockville, Maryland.

 

Read the complete Perspectives with footnotes here.

 

         

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