Recently, the Netherlands became the second country in the world to incorporate network neutrality into law. The effect of the law is to prevent mobile internet service providers (ISPs) from charging extra for access to certain internet services beyond the amount of data that the services use. Effectively, they must treat all data equally. Furthermore, the U.S. Federal Communications Commision recently passed a law banning cable companies that control internet services from blocking access to competing services. These restrictions are necessary to prevent near-monopoly providers from utilizing their market power to take advantage of consumers or engage in anti-competitive behavior.
The practice of charging people differently based on how much they value a service, as opposed to how much the service costs to produce, is called price discrimination. The purpose of this practice is to charge different people different prices, even if both people are consuming the same thing, which in this case is data. Companies attempt to charge consumers a price as close as possible to how much the consumers value the product to extract as much surplus from them as possible. Without net neutrality, ISPs would be able to get away with these practices because the ISP market is an oligopoly with a few very large providers.
A completely unregulated, non-neutral internet would only work if the ISP market wasn't as centralized as it currently is. If start-up costs were low and anyone could easily become an ISP then society wouldn't have to worry about ISP's exploiting customers because competition would solve the issue. ISPs would be unable to take advantage of consumers as many other competing ISPs would quickly undercut any anti-competitive pricing schemes. Unfortunately, since internet infrastructure requires a large amount of fixed cost investment, having a few centralized ISPs is the most efficient way of providing internet access. Because of this, regulations must be put in place to ensure that ISPs don’t use their market power to exploit the consumer.
A common complaint is that these net neutrality regulations would reduce ISPs profits, thereby reducing their incentive to invest in internet infrastructure. This is true, but the lost investment would not offset the significant consumer surplus losses that would result from exploitative price discrimination practices. This is because the benefit of infrastructure investment to the consumer is the low prices that come from an increase in supply but in this case it’s the high prices that are causing the investment in infrastructure. Thus, the benefits of the investment would go entirely to the ISPs. Our laws should be set up to protect the consumer and in order to deem an anti-consumer practice allowable, companies must show that the practices produce efficiency gains, not just profit gains.
There are no efficiency justifications for charging people differently based on the type data that they download. If ISPs are concerned about bandwidth issues then the correct thing to do would be to give people a bandwidth quota and charge those who use too much of it. From a technological standpoint, it doesn’t matter what the data is; all that matters is how much bandwidth customers are using.
Price discrimination is a practice that businesses with large market shares use to charge exploitive prices. Implementing net neutrality to ensure that this practice does not infect the extremely non-competitive ISP market is necessary.
Photo Credit: Wikimedia Commons