The economics of the net neutrality debate

There’s a great conversation going on over at Marginal Revolution about net neutrality. As a card carrying free-marketeer I feel I’m expected to support Verizon, AT&T and the rest when they demand payment for use of their pipes. But I haven’t made up my mind yet. While net neutrality looks like forced access redux, I think it’s actually a much more complicated issue.

I am skeptical of regulation or legislation to enforce neutrality; preemptive regulation hardly ever works out they way it is intended. However, as Tyler Cowen points out, tiering the internet would change the nature of online content:

The beauty of the status quo is that web sites compete on the basis of consumer surplus alone. The bandwidth costs end up as a fixed charge on net access as a whole; I suspect this hits many inelastic demanders, a’la the Ramsey rules for optimal taxation. Admittedly it may be a bad deal for the poor who cannot afford to connect, but the overall arrangement enhances the long-run “competition of ideas” feature of the net.

It seems to me that the obvious solution to this problem is to get rid of flat-rate access charges and move to variable prices based on bandwidth usage. Sadly, consumers have historically resisted per-unit access charges, even when they would have come out ahead. They like the idea of not being rushed to disconnect or feeling pressure to monitor and cap their use.

What’s more, bandwidth consumption in itself is not the problem. Bandwidth consumption at peak times, causing congestion, is the real problem. But, as Arnold King points out, the internet is not suited to incorporate 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.

Even if we did want to go the route of a two-tiered internet anyway, with one tier getting preferred delivery, it’s not clear how we can do this without breaking what makes the net unique. Ed Felten clarifies that “although the two-tier network is sometimes explained as if there were two tiers of network infrastructure, the obvious and efficient implementation in practice would be to have a single fast network, and to impose deliberate delay or bandwidth throttling on non-preferred traffic.”

So, I guess what I’m ultimately arriving at is that while I’m far from sold on net neutrality regulation, I like the neutral nature of the internet. And, given that it would be technically difficult and unpopular with consumers to tier the net, I’d like to think that a free market would preserve neutrality. What we need to ensure is robust competition so that a small number of ISPs can’t push this down consumers throats. Jeff Pulver is right that what Google, Apple, and Yahoo need to do is call the telcos’ bluff and make it clear they’re not going to consider paying the ISPs. What’s are the ISPs going to do? Tell their customers they can no longer access Google or iTunes?

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