Arnold Kling  

Net Neutrality?

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Greg Mankiw writes,


After reading these two pieces [on proposals to force Internet carriers to be "neutral"], I am inclined to give the edge to Litan, in part because his piece is more infused with economic reasoning and in part because I am naturally suspect of the alarmist tone of Lessig and McChesney.

I am naturally suspect of Lessig, because my views tend to be his with a minus sign. My view of the Internet is that it is an existence proof for Hayekian spontaneous order, and Lessig always reminds me of the joke about how Hell was created. God and the devil were walking together, and they saw heaven. "It's perfect," the devil admitted. "Here, let me organize it for you."

Seriously, the go-to guy on Internet economics is Andrew Odlyzko. Of all his papers, the one that is most relevant to the topic at hand is this piece on layered architecture. He writes,


There is also a very fundamental problem with the layer model, related to the inhibiting effect it would have on price discrimination. Differential pricing, in which customers pay varying prices for what may be essentially the same goods or services, are at the heart of regulation. In telecommunications, we observe...strong economic incentives for price discrimination, and against charging per byte or per packet. A physical layer service provider that charged just by the volume of traffic could not take advantage of the variation in willingness to pay. But it is the basic connectivity provider that has the high costs that are of greatest concern in discussions about deployment of broadband...

it appears that technology and financial market dynamics might lead to several competing access methods (in particular DSL, cable, and wireless [Odlyzko1]) being widely available to most customers, with each providing an essentially complete suite of telecom services. This is likely to happen considerably faster than a layers model for regulation could be implemented.


In other words, competition is likely to be a better regulator than Congress for Internet service.


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TRACKBACKS (6 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/524
The author at A Stitch in Haste in a related article titled More on Net Neutrality writes:
    He's right...
    New network technologies and management tools not only keep the Internet flowing, they also spur innovation. They can make sure applications requiring low de...
    [Tracked on June 9, 2006 9:43 AM]
The author at Life, Liberty and the Pursuit of ... in a related article titled On Net Nuetrality writes:
    My opposition was based primarily on two grounds. First, it is much easier to implement regulation after harm has actually been done than it is to remove regulation later on. [Tracked on June 9, 2006 11:00 AM]
COMMENTS (7 to date)
Eli writes:

Agreed. I wrote about this issue a couple weeks ago.

Ted Shelton writes:

What do you make of Josephe Bertrand's theory that a duopoly will arrive over time at pricing equilibrium and how does this factor into a market where technological changes ought to be destabilizing such equilibrium? Does the dynamic of the duopoly tend to override the underlying changes in the costs? Or will technical innovation tend to destabilize the equilibrium?

"Net Neutrality" may be the wrong rallying cry, but the concern that a portion of the public trust (roads, telephone poles, airwaves) are being ceded to private control and thus the public should have some say in how they are utilized would seem reasonable on its own merit.

The push by telecom and cable interests to entirely deregulate their industries creates an enormous potential for abuse -- how should we monitor and regulate these enterprises in order to reduce that abuse?

Fazal Majid writes:

The Internet spawned off massive government spending by DARPA then the NSF from the sixties well into the eighties. Seeing it as evidence of Hayekian self-order is wishful thinking.

As for net neutrality, it is an attempt to mitigate perceived market failure. Other countries do not have debates about network neutrality, simply because no big player there (not even in dirigiste France or Keiretsu-friendly Japan and Korea) has the kind of market power AT&T or Verizon or Comcast enjoy in the US.

Much of the mess is due to the abject failure of the 1996 Telecom Act and the FCC to foster competition, in fact quite the opposite happened, which is not surprising when you consider how much money telcos spend on lobbying and lawyers.

Robert writes:

There is also a very fundamental problem with the layer model, related to the inhibiting effect it would have on price discrimination.

This seems to take it for granted that unless the telco can appropriate almost all of the the value created by the transactions it participates in, a Bad Thing has occurred. This is not at all obvious to me.

Unless communications networks become substantially more competitive than they are today, the ability of the telco to practice price discrimination means that it is impossible to make real profits with a business model that depends on the internet: making a profit sends a signal to the telco that you are experiencing value from your transactions with them that because of their superior negotiating position in their dealings with you, they can appropriate for themselves.

Mr. Econotarian writes:

It is true that the Internet was founded through government largesse, but the development we know today as the commercial Internet developed in an atmosphere of near zero regulation. Despite the entry of a large number of Tier-1 Internet service providers, the Internet remained pretty much completely connected.

There were lots of "I won't peer with you" moments, but in the end no ISP wanted to deliver less than the complete Internet.

I don't think that any broadband provider would want to provide less than the complete Internet either. There are enough competing modalities (DSL, Cable, terrestrial wireless, broadband over powerl lines, satellite, not to mention dial-up) that there shouldn't have to be any serious "net neutrality" regulation.

On the other hand, I can easilly imagine damaging regulation from the government. Think price gouging.

boxer writes:

Internet most probably would have started even without govt initiatiion - it was technology that was lacking.

The key ingredients of internet are Ethernet (physical layer), some sort of network protocol (DecNET or Banyan networks), the graphical interface and mouse.

All of them have been invented in a private company, Palo Alto Research Center of Xerox. The first browser, Mosaic, was also largely privately invented. Multitasking OS like Unix was also largely a private hobby done on corporate machine by Thompson and Ritchie.

The only piece of contemporary internet that was invented in govt facilities was HTML and HTTP protocol, obviously by Tim Berners-Lee in CERN. Read, however, more detailed history of hypertext:


http://www.robotwisdom.com/web/timeline.html


Wide-area networks in form of phone companies were also largely privately built in many countries.

So almost all key pieces of internet have been already done by individuals or companies about the time govt funded the ArpaNET.

Correlation is not causation. Internet would have been created with or without government. Perhaps we would even get network protocol better than TCP/IP, which however workable, has a good share of problems. The next version that was supposed to be a big story, IPv6 is dead meat in practice. How come, given the seminal role of the govt?

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