Arnold Kling

Information Highway Robbery?

Arnold Kling, Great Questions of Economics
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Bob Frankston does not care for a pricing model in which a connectivity provider obtains a share of revenue from business transactions conducted using its service.

What gives ATT the right to grab revenue from a company just because it uses their wires? Imagine if ATT insisted on taking a cut of every transaction done over its phone lines!

In the market, any voluntary contract between consenting adults is legitimate. If a business would rather pay for Internet service by sharing its transaction revenues than by paying a flat rate, then neither Frankston nor anyone else should try to stop them.

I think that what Frankston would say is that no consenting adult would agree to share transaction revenues with an Internet provider, unless that provider were a monopolist that gave you no choice. That may be what is happening here, in which case the challenge is to regulate monopoly profits, regardless of how ATT chooses to extract them--through transaction revenue sharing or simply by charging exorbitant rates.

Discussion Question. Monopolists tend to gain through price discrimination. Why might transaction revenue-sharing help to facilitate price discrimination? Is this form of price discrimination adverse for the economy as a whole?

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