[10928] in Commercialization & Privatization of the Internet
flat-rate=cross subsidy (was: FCC strikes the internet)
daemon@ATHENA.MIT.EDU (Roger Bohn)
Mon Mar 14 22:23:04 1994
Date: Mon, 14 Mar 1994 12:54:26 -0800
To: karl@mcs.com (Karl Denninger), fidelman@civicnet.org (Miles R Fidelman)
From: Rbohn@ucsd.edu (Roger Bohn)
Cc: com-priv@psi.com
At 6:53 PM 3/13/94 -0600, Karl Denninger wrote:
>Finally, let's look at this. You wanted originally flat-rate email. Now
>all of a sudden its SLIP access. That's MASSIVELY expanded service, is it
>not? Yes, there are companies (mine is one) which will sell you that kind
>of service. Are you arguing for <mandating> this? What if it turns out
>that 2-3 years from now the "flat rate" ends up being "24 hour connected
>for 90% of the users" and it becomes impossible to support that pricing
>model?
Just a reminder: Karl is alluding some of the key tradeoffs with flat rate
pricing. Don't pretend flat rates are for the good of the individual end
users; they wind up causing light users to subsidize heavy users, which
means _from_ individuals, _to_ small business/stay at home offices.
A flat rate, which exactly covers all costs, ends up creating a subsidy for
the heavy users, at the expense of the light users. (Since under usage
based pricing, light users would pay only a little, and heavy users pay a
lot; yet total revenue collected is the same or higher.) It also leads to
inefficiency, since no one has an incentive to conserve on login time. (In
most but not all network architectures, this would raise costs, for
everyone.)
The cross-subsidy then leads to a phenomenon economists call "adverse
selection". The light users don't sign up because the monthly flat bill is
bigger than the value they will get, which raises the average load profile,
which raises the flat rate.....
This is not necessarily terrible; it depends on how it plays out and how
many light users get screwed. But it is a cross-subsidy of the
"information-rich", _by the information-poor_ (light users).
You _can_ flout the laws of supply and demand with legislation, but the
consequences may not be what you expect. All this was discussed last Fall
on the topic of transmission pricing, with even more heat.
Roger Bohn Rbohn@ucsd.edu
International Relations and Pacific Studies
University of California, San Diego
Phone (619) 534-7630
Fax (619) 534-3939
