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Economics & Finance - BLOG

Net Neutrality: Time for a Bandwidth Market?

Miklos Sarvary, Carson Family Professor of Business at Columbia Business School |

Letting the market price internet bandwidth is not a bad idea.

Last Tuesday, Verizon won a case against the Federal Communications Commission (FCC) in a US court, where the judge ruled that "the FCC had over-reached its powers in imposing 'net neutrality' rules on internet service providers" (see FT article here). While the battle for (or against) net neutrality is far from over - e.g. the FCC considers an appeal among other possible measures - it is definitely a decisive step towards differential pricing for speed/transmission quality of internet content. Advocates of net neutrality argue that this may favor large internet companies with deep pockets (e.g. Google) and lock out cash-poor start-ups, thereby stifling innovation. But does this argument really hold?

For one, perfect net neutrality cannot really exist. Bandwidth is a limited resource and, being free, congestion is impossible to avoid. Service providers have always had to manage bandwidth to make sure that one provider is not overusing the system to the detriment of others. Until now, they’ve had to do this in an ad hoc manner. It seems to me that creating a market for bandwidth is not necessarily a bad idea: maybe running an auction in real time? For one, this may actually increase overall bandwidth because companies investing in infrastructure can recoup their investments better by charging their users more efficiently (the assumption being that consumers' willingness to pay for content will be reflected in content providers' willingness to pay for bandwidth, i.e. access to these consumers).

A consequence is that free content may be more scarce on the internet. But again, while this is bad for consumers in the short-run, it may actually help innovation (content providers can charge for their material), thereby making consumers better off in the long run. Wouldn't it be great, for instance, if sites providing pirated content would be 'penalised' for using excessive amounts of bandwidth? Funnily, Google, which counts as an "incumbent with deep pockets" is a big supporter of net neutrality. Doesn't this suggest that it benefits disproportionately from it? Given the bandwidth used to upload and stream YouTube videos, it wouldn't be surprising.

More generally, it is not clear that such "heavy" regulation (net neutrality is pretty heavy in my mind) is needed in this case. The FCC could impose a "minimum access" rule for instance in the spirit of "free speech" but let the market figure out how to price scarce resources beyond that.

 

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Comments
Missyg,

Net neutrality is an issue that hasn't been squashed yet. It's more important than ever to learn the issues.

Raindeer,

We will set aside that there is already a market for Internet traffic governed by the rules of Peering and Transit. So each market participant already pays for the traffic they use.

What you are thinking of is an additional market where those who are currently a customer of another network can be charged too. So for example INSEAD could be charged for the traffic it generates on Comcasts AS7922 network and vice versa or INSEAD AS13315 could charge Harvard Business School AS25207 for the traffic it generates.

There is however a small element called termination monopolies. Harvard could value itself more than INSEAD and charge more for the same traffic. So that when a user at Harvard clicks on blogpost at INSEAD, INSEAD will have to pay more than the other way for the same amount of data. And that would of course be an understandable situation, because Harvard tops INSEAD in most rankings, so professors at INSEAD would be honored and gladly pay professors at Harvard for the use of the Harvard network.

There are currently over 40,000 active networks on the Internet, as denominated by the number of AS numbers. So all we need to do is set up a market clearing house that allows all parties to set termination rates. To make it a well functioning market I would assume we would have to see price discrimination between those AS's, so theoretically we can see 40,000^2 price combinations.

Now all we need is a bit of governance and dispute resolution, when certain parties set their termination rates at a too high rate according to other market participants. Of course we could go for a system where access will just be blocked, but that would go against the open nature, so we would need a regulator that can establish a fair rate for the exchange of traffic between Harvard and Insead.

I am sure this is a business plan that any MBA student would sign up for and I kindly donate it to the first comer to make this the cornerstone of his billion dollar start-up.

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