There’s No Neutrality When Price Discriminating
This past December, the Federal Communications Commission (FCC) voted to remove the net neutrality regulations that prevented internet service providers (ISPs) from blocking consumer access to certain sites or charging different rates based on data usage.
Like most media stories, the controversy behind the repeal of net neutrality came as a storm on social media, with countless posts and petitions to rally against the FCC’s push to dismantle the regulations. However, it’s important to remember that net neutrality has not been around since the days of ARPANET, the internet’s youth. Instead, net neutrality has only been around since 2015, and represented a new step in the way the government would regulate ISPs.
Most of the social media attention on how net neutrality would affect consumers was usually centered on how now Comcast can now charge more for your binge session of Gossip Girl. ISPs have argued that by axing net neutrality, this will allow them to provide more plans that should appeal to a larger audience, as a variety of plans can be offered at different tiered pricing. However, most debates surrounding the topic did not dig into the real question—is the internet a service that can be price discriminated?
Usually when we think of discrimination we typically think prejudice and intolerance. However, pricing discrimination is very different, and in some cases very acceptable depending on the good or service.
Price discrimination is an economic strategy that describes the practice of charging consumers different prices for an identical good or service. This runs contrary to the law of one price, which says that regardless of location a good or service must sell for the same price. So, from this you’re telling me that it’s okay for my local pizzeria to charge me $3.00 per slice, but only charge my much more charming brother only $1.50 per slice?
Not quite. In fact, there’s quite a few necessary conditions that must be fulfilled to be able to price discriminate. First, the consumer base has to be made up of different types of consumers that have varying preferences and elasticities—or responsiveness to changes in price. Second, the different markets have to be kept separate from one another. Third, there cannot be room for arbitrage for one person to buy in a cheap market and sell in a more expensive market. An example of this would be a senior citizen selling his cheaper museum ticket to an adult—who would typically have to pay more. And last, firms have to have monopoly power, or better said, have the power to dictate the prices.
So, why would firms charge different prices to different groups if they could? Easy—to maximize profits. Let’s go back to our museum example. At most museums, tickets are broken down into children, adults and seniors; children and seniors being the cheapest tickets and the adult tickets being the most expensive. So why is that? Seniors and adults have different responsiveness to changes in price, this is most likely do to the difference in the flow of income between the two. A senior’s income from their pension or retirement fund is fixed and finite; as a result, they may be more frugal with their money when prices increase. Whereas most adults have a steady flow of income and foresee that flow continuing, therefore are less responsive to changes in price.
So, let’s say our adult tickets are $20.00 and our senior tickets are $10.00. This difference in price allows us to get the maximum amount of people in and help to maximize our museum’s profits (apparently we’re a for-profit museum), as seniors just would not purchase tickets if the price was that high.
Going back to our net neutrality debate, does the internet have the necessary conditions to be a price discriminated good? Well, there are ultiple markets geographically and demographically for the internet. Millennials are more likely to use the internet more often than non-millennials. In addition, I can’t sell my internet usage to someone else because it only comes to me—similar to how I can’t really sell my tap water. And last, big companies like Comcast and Time Warner definitely have the pricing power.
So if ISPs and the internet fit these necessary conditions for price discrimination, Then why are we so upset after this repeal of net neutrality? Well perhaps some goods shouldn’t be price discriminated. This is especially true if a good or service is seen as a utility.
Remember that time you upgraded your tap water plan to get the gallons per minute rate that created the optimal water pressure? Or the time you downgraded your electric plan because the roll-over kilowatts just weren’t worth it? If this has never happened to you, then this makes sense. Utilities are regulated differently than other industries and as a result there isn’t an option for price discrimination.
While on paper ISPs should be able to price discriminate, perhaps we have to understand the internet as a utility rather than a standard service. Nonetheless, it will be interesting to see if more price sensitive consumers are brought onto the internet by the repeal of net neutrality.
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Lim, Diane. “How ‘Net Neutrality’ Would Neutralize the Internet’s Market Price System and Fail to Achieve Its ‘Free and Open’ Goals.” Committee for Economic Development of The Conference Board. Accessed January 11, 2018. https://www.ced.org/blog/entry/how-net-neutrality-would-neutralize-the-internets-market-price-system-and-f.
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