Pricing the Internet
By Arnold Kling
Tyler Cowen steps into an old issue, of how Internet usage ought to be priced.
In purely economic terms, the idea of charging Google or other “bandwidth hogs” does not sound outrageous.
The casual assumption here is that bandwidth is a scarce resource. But if so, where is it scarce? At Google’s data center? Near my house? Somewhere in between, on the Internet “backbone?”When Hal Varian looked at this issue, he took the view that the main pricing issue regarding the Internet is congestion. In theory, somebody who wants to send bits at a time when everyone else wants to send bits should pay a premium. Otherwise, if you are willing to have your movie download take place at off-peak times, the marginal cost ought to be zero.
So, there is no such thing as a bandwidth hog. In theory, there is such a thing as someone who is willing to pay more to get the fastest response during peak times.
However, the current internet protocols do not facilitate congestion-based pricing. Think of Internet packets as envelopes with very exact formats for the address. The format does not provide for a way to designate the envelope as “high priority.” Even if it did, the cost of reading the “priority bit” on every packet header would almost surely exceed the benefits of congestion pricing.
I think that this design limitation (or feature) would hamper a lot of the efforts of the telephone companies to charge differential prices for different content providers. However, I assume that the telephone companies must think that it is technically cost-effective to charge differential prices, or else they would not be lobbying for it.
Fundamentally, I think that the telephone companies over-estimate the value of what they have. The Internet backbone is critical, but the cost per user is low. The cost per user of the “last mile” is expensive, but the high-bandwidth lines into people’s homes are not critical. I think that we could, and in the not-too-distant future will, have a wireless last mile, which will be embedded in communications hardware, not centrally owned the way that land lines are today.
The land line “Baby Bell” phone companies are not going to design and enforce a new Internet pricing regime. Their destiny is bankruptcy.