Tyler Cowen on Net Neutrality

Read the whole post, but here is a taste:

4. Ex ante, it is hard to predict what will “stick” on the Net. I see positive and uninternalized social value in the level of experimentation which we currently enjoy. Profit-maximizing pricing from Verizon and Comcast would choke this off to some degree.

5. Bandwidth might become so scarce that differential pricing is needed to give companies the incentive to create more of it. Then net neutrality could be a bad idea, even in spite of #1-4. But we are not there now and maybe we will never be. Municipal wireless, or some related idea, probably will arrive first. …

6. A related question is this: we all know that road pricing can make economic sense. But should we favor differential and profit-maximizing pricing on non-contestable roads? At low levels of congestion, probably not. It is better to let people get to work.

2 thoughts on “Tyler Cowen on Net Neutrality

  1. I’ve long enjoyed Cowen’s work and blog. That commentary strikes me as eminently sensible. But for “equal time,” here’s a quote from a recent Chronicle of Higher Ed. column that nicely marshalls the arguments of opponents of net neutrality.

    (By the way, I am really puzzled by this quote from the quote:
    “A venerable theorem in economics holds that monopolists can extract excess profits only from the industry they monopolize, and not from “complementary” industries.” To contextualize that, the whole rest of this comment is from the article; original article available at:
    http://chronicle.com/weekly/v52/i40/40a01401.htm


    Net neutrality’s skeptics marshal several types of argument in reply. First, they say that even though most cities now have a monopoly or duopoly in broadband (typically, one cable company and one telephone company offer the service), that situation will quickly change. New technologies will allow households to receive Internet connections wirelessly, or even through their standard electric lines. Those new services, they say, will eliminate any scarcity of broadband suppliers and make the market much more competitive, quashing price-gouging and anticompetitive behavior. In effect there will be not 14 grain elevators but hundreds.

    “Within five years, all of these technologies will be emerging,” says Philip J. Weiser, an associate professor of law and communications at the University of Colorado at Boulder and a co-author of Digital Crossroads: American Telecommunications Policy in the Internet Age (MIT Press, 2005). “On top of that, you’ll also see improvements in digital processing and who knows what.”

    Some skeptics also suggest that network-neutrality regulation would perversely make it more, not less, likely that a near-monopoly will persist in the industry. With regulation in place, they argue, new companies will have fewer financial incentives to enter the market. Mr. Weiser says small, upstart wireless-broadband services might be able to raise crucial capital only if they form exclusive partnerships with, say, television networks or telephone companies. Network neutrality would prevent such deals.

    And even if there were a permanent monopoly or duopoly in broadband, net-neutrality skeptics contend, providers would have no incentive to distort the markets for content providers or application developers. (A venerable theorem in economics holds that monopolists can extract excess profits only from the industry they monopolize, and not from “complementary” industries.) “I believe that most firms that are rational strategists would actually welcome new applications to the network because they will increase the value of the network,” says Mr. Weiser.

    Skeptics also say that the most important Internet innovations might involve improvements in the structure of the network itself — and that network-neutrality regulations would stifle such improvements. “If we were to have standardized electric power at an early time, we would have standardized on DC power,” says Christopher S. Yoo, a professor of law at Vanderbilt University. “And that would be a problem.” (Alternating-current systems are cheaper and safer than the direct-current systems they replaced.)

    “A lot of this debate has to do with whether you believe innovations happen at the edges of the network or at the core of the network,” says Mr. Weiser. “Some people are almost religious about this issue.” Supporters of the Internet’s “end to end” architecture, like Mr. Wu and Mr. Lessig, believe that the most important innovations happen at the edges. They say the “core” of the network — its central backbone — should not be tinkered with in ways that would make it difficult for innovators to create and install new applications.

  2. Thanks Frank, it is always good to have some balance. As I’ve said many times, I think there are good reasons to be skeptical of the arguments raised by the skeptics. While Phil Weiser’s point that network owners generally welcome innovative applications because of the increased value to the network makes sense, there are many exceptions to this, as he and others have explained (he has a great paper in the Harvard Journal of Law and Technology on this; Barbara van Schewick has two papers as well, on ssrn.com I believe). One important exception, in my view, is where value derived from applications is not observed or appreciated fully by users and thus results in spillovers off the network (as is the case for many Internet applications). Network owners surely love it when innovative applications increase users’ willingness to pay for access to the network, but they could care less about innovative applications that are socially but not privately valued. They certainly prefer the former to the latter, but even if they do not act affirmatively to “distort” the markets for content or applications, a system that permits application-sensitive pricing — which is essentially a means for price discrimination — would itself prioritize traffic in a manner that favors one form of innovation over the other.

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