In my last post I describe one argument that ISPs are using to combat net neutrality legislation. Namely, that tiered pricing is necessary to incentivize ISPs to continue investments in better infrastructure. As I stated, at first blush the argument seems logical. That by employing pricing leverage the ISPs can make more money and thus have more to invest in their networks. However, an astute student of economic will quickly see the logical fallacy of such an argument.
Increased pricing power leading to higher profits in no relates to capital expenditures or investment on the part of the ISP. In fact, their is economic theory to suggest that exactly the opposite is true. Let me explain why: When the ISP can have multiple pricing regimes to support discriminatory pricing, and the ISP needs/wants to increase profits, they simply increase the top rate (the tier one rate). Those companies/customers paying for tier one access clearly need priority treatment of their traffic and are thus willing to pay for it. This leads the ISP to higher profits. In a non-tiered system, however, the ISP does not have the luxury of raising prices for only those tier 1 customers. If they raise prices for everyone, they risk alienating those who do not value priority. Thus, The lack of a premium pricing revenue stream may increase incentives to invest in greater infrastructure to serve greater, flat-rate volume. “ISP’s incentive to invest on capacity under a discriminatory network can be smaller than that under a neutral regime where such rent extraction effects do not exist”* This would actually seem to suggest that a neutral net policy would support greater investment in future infrastructure enhancements.
Good Talk,
Tom
*Choi, J. P., & Kim, B.-C. (2008). Net Neutrality and Investment Incentives, CESifo Working Paper No. 2390.
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