You get what you pay for?
I am occasionally dazzled how sometimes people think because the internet is involved, that economics should be “different†– as if the fundamental facts of scarcity and the “laws of economics†should no longer apply. Check out this article from yahoo.com.
The subject of the article is the way that internet access is priced. The standard practice is to charge all users the same flat rate, regardless of how much the household uses. The article points out that a small fraction of internet users (5%) use about half of the bandwidth. That is, there are a large number of light or occasional users, and a small number of very intense users.
The question that comes to mind – should the households that use the internet more intensely be charged more? Time-Warner’s answer seems to be “maybeâ€. They are considering billing people on the basis of usage instead of the flat monthly rate. My answer is yes. Why shouldn’t they be?
Before we get too far, it is good to think about the beneficiaries of such a policy. If everyone is paying the same price, broadly speaking, the intense users are receiving a “discount†and the casual users are not. Clearly the people who stand to lose from a fee based on usage are those that are intense users. They’ll scream bloody murder. But there is another perspective – what is a good way to use society’s scarce resources? More downloading by person A means slower downloading for person B.
This isn’t an internet only phenomenon. A nearly identical situation came up at Nicholls last semester with a proposal for a per-unit fee for printing in academic computing labs. For the background, see the Nichols Worth articles here and here – the first is a factual article, the second the take of the Nicholls Worth editorial staff. In this case, the status-quo was a per-month fee for printing with no fee per-page printed. The proposal being considered was a per-page fee. As you can see from the editorial, there is at least some resistance. My guess is that the folks over at the Nicholls Worth do a lot of printing in labs, but I can’t be sure.
Why do I care? As we begin the semester, one of the most central concepts in Econ 211 is called the 1st Law of Demand. It states, quite simply, as the price of a good or service increases, consumers will wish to purchase a lower quantity of that good.
With a flat monthly fee, once the fee is paid, the price of additional internet usage (or pages printed) is literally zero. We would expect quite a lot of downloading (and printing). In fact, the last few items downloaded (or printed) would have very little value to the consumer. The problem is that there is a disconnect between the person using the resource and the cost of the resource being used. Resources will be used on low-value downloading (or printing). Resources are being wasted.
With a per-unit fee, the 1st Law of Demand tells us less downloading (printing will occur). The decision makers will not have to consider both the benefits and the costs of their actions, and will choose accordingly.
In the printing case, students will be more careful about what they print – they might avoid printing three copies of the same lectures notes, or not print out 60 pages of an article if all they need is the first few. There will be less “waste†and surely the total amount of printing on campus would fall significantly. We’d expect the same in internet, which means less congestion and better service.
Here’s the prevailing wisdom of the internet – a quote from the yahoo article.
But the move could prove controversial. Unlike with utility bills such as the phone or electricity, which have traditionally been based on usage, U.S. high-speed Internet subscribers have come to expect a fixed monthly charge.
Golly, because people expect a fixed monthly charge, we better give them a monthly, charge, eh?
–CT
January 21st, 2008 at 2:40 pm
I support the position of Time Warner to charge for broadband (high-speed internet) based on usage.
Time Warner expressed that they are concerned about alarming customers and also they do not want to test their plan nationwide. I offer my opinion on this topic and their concerns. I interpret the flat fee that is charged now is probably based on the consumption of the average user. Time Warner could create positive support for their initiative from their majority customers, whom have little to average broadband use. Details should be provided before implementing the usage fee by providing each customer with a meter of some sorts so that they can witness their actual usage and what it ‘would’ cost, under the proposed usage plan. The ‘average’ user will see that his costs will stay +/- the current cost; the ‘small’ user a decrease in the current cost; and those ‘over the average’ more than the current cost. Also detailed anonymous usage statistics (not the websites people visit) of all users should be provided which will allow the customers to understand why this change is needed, and when the time comes to implement a usage pay system, there may be less apprehension from Time Warner’s broadband majority. Once usage pay is in place, the terms small user, average user, and high user have no meaning. If they charge the fair market price (however it will be setup, minute, hour?) potentially their current ‘small’ and ‘average’ broadband users may pass the word around to friends and family that a better deal can be found with Time Warner under this usage pay. Hopefully, other users may switch from their flat fee plan to Time Warner for broadband and maybe even television services they offer.
With regard to students printing on campus, again I agree. If the university adopts a per page fee (usage), they should also eliminate the portion of the Instructional Technology Fee that is used to fund student printing. Also if the fee continues to be a part of tuition, for those that end up not printing on campus during the semester, this paid fee should be reimbursed.
While the university is contemplating a usage fee, they could consider parking permits. From what I gather (uncertain), the parking fee (decal) is based on the academic year ($50) and not a semester basis. I began Nicholls this Spring and the cost of the parking permit was $50. I checked, and if I was enrolled in the Fall, the fee still would have been $50 and it would have allowed me to park during the Fall, Spring, and Summer Sessions. I paid to park in the Fall 2007 semester and I was not enrolled in a single class. Another example of why parking permit costs may need changing is, if a student is graduating in the Fall semester, and that student will not be enrolled or present for the Spring or Summer sessions, that student should pay a reduced fee for Fall only parking.
To the university’s credit, they do reduce the parking cost when one purchases a permit for Summer session only which seems fair for the student to use parking for the Summer session.
January 27th, 2008 at 11:25 pm
Obviously per page payment (or data usage on the internet) is a good thing. I say this because I don’t print large quantities of notes at school. Therefore, my benefit is to have one less fixed fee to pay for at the beginning of a semester. I have a laser jet printer which makes printing extremely cheap thus making it much cheaper to do the job at home instead of school. Some peers of mine have discussed pay per page printing and we’ve had mixed opinions. However, those students who are antipathetic to the proposed plan tend to print more and it effects then more. The only reason I can imagine that Nicholls would not want to move to such a proposal would be either too many complaints or if the University would want us to use the printers on campus at least to some extent. One thing is for certain. I have a fixed amount of papers I can print per semester and I intend to use them. My peers share a similar viewpoint which means the university is having wasted resources.
January 28th, 2008 at 5:03 pm
I do not think it would be beneficial for Time Warner to switch to a plan where the Internet is charged based on usage. It goes against the economic principle that people do not like surprises. Most customers would rather pay a fixed monthly rate rather than not know how much they will be paying on their next bill. It is kind of like a teenager’s first cell phone with a basic plan and the teen ends up using all the extra features. At the end of the first month the parents are upset because of the extra usage charges when it would have saved them money to have an extended plan. The only people who would benefit from this new pay by usage plan are those who infrequently use the Internet. Besides that most people would like to know ahead of time exactly how much they will be paying, and I believe that if Time Warner switched to charging based on use that most customers would find another provider for their Internet.
January 28th, 2008 at 6:38 pm
It’s a fair assumption that people, or at least the majority of people that I know are inherently opposed to change, especially if that change brings uncertainty, particularly uncertainty involving their money. Should Time Warner charge based on usage – of course they should. This change would lower the excess traffic of the few hardcore users causing better service for the more casual users and allowing Time Warner to cut the excess costs related the high usage, which will more than likely lead to lower costs for the casual user. This better service would then attract a larger number of casual users and thus increase subscriptions allowing Time Warner to grow its operations proportionately to its revenues from subscriptions rather than growing its staff without increasing revenues.
The few hardcore users would argue that Time Warner runs the risk of losing the subscriptions of those users who use the internet a lot. This will undoubtedly happen, but the extent to which it will happen is unknown and couldn’t be readily estimated. The loss of these few customers could be accounted for by simply laying off those extra workers who were only there to deal with the problems caused by excessive usage until enough public awareness gets out to the casual users, and the company can hire back those workers to do efficient work.
Segments could say this is unfair to those who have to use the internet a lot. I say not so much. These users have enjoyed a competitive advantage for far too long. In economics, “fair†is normative. Economics creates winners and losers and just because you are a “loser†doesn’t mean that you have failed, or people don’t like you, or you live with your mom at age 40, it simply means that for this particular resource (here internet), your competitive advantage has run out and you must use your skills to gain an advantage in some other way. In this sense, everyone has an equal opportunity for success.
David Dominique
January 28th, 2008 at 10:23 pm
Wow. I need to work on my grammar.
January 29th, 2008 at 8:18 pm
I think this is wrong. Carl Icahn owns three percent of Time Warner stock, he is also one of the richest people in the world, he is also known as a cooperate raider. He along with his pals has made some bad decisions in the last few months, in fact Time Warner stock was down 10 percent last year. This is a way of gaining the lost profits back. If this does happen, it will be nation wide with all carriers in the short future. The larger issue will be by restricting the bandwidth; internet innovation will slow down drastically. This whole problem about companies cannot provide enough bandwidth is overblown, according to other surveys. Do you think that YouTube would be around if this was being done a few years ago? Will the subscribers still be told that they are getting unlimited usage? Time Warner has their hands in too much, from films to CNN money watch, this is the problem, and it is getting passed down to us.
Kurt Merrill
January 31st, 2008 at 11:58 am
It seems to me that an internet providers can easily make charges based on use attractive to users by charging lower fixed charges and charges that ramp up after certain levels of use.
The less intense users also may prefer a provider who charged in this fashion. The externality of slower access speed when another user is taking up enourmous amounts of bandwidth is quite significant. Users who see slow speeds when others are bandwidth hogs may prefer not to share bandwidth hogs. (I do understand that certain types of distribution systems, such as cable are more prone to bandwidth degredation from bandwidth hogs than others.)
In addition to helping to avoid bandwidth degredation, providers can also charge lower prices (fixed charge and use charge) to less intense users, users who generally have lower demands, and higher total (and marginal) prices to the less elastic intense users. While this is a good way to price discriminate, it also makes a great deal of sense. Charging in this fashion makes users sensitive to their bandwidth use, and take greater measures to avoid frivolous downloads. This reduces the problem of Moral Hazard (if you are not familiar with this idea, look it up on Wikipedia).
-MC
January 31st, 2008 at 6:27 pm
I used to be (I am not anymore) one of those high intensity users making the best value of my money by often downloading things that I didn’t really need. My motto was:â€It doesn’t matter what’s downloading, as long as it is downloading.†I agree that new method of payment might make me rationalize my downloads, however what I think would happen more likely is I would simply switch the service provider. And 99.93% of users affected by the change would do the same thing. That would bring the advantage to the company that would keep providing the services under the same conditions. Flat rate was primarily used as a way to attract customers.
Time Warner is going to make a step backwards and have loses rather than profits. They would instantly loose 5% of their customers. Furthermore, they would collect less money from the remaining customers since they have less usage. I don’t think that the new method will be proven successful.