Lectures in Microeconomics-Charles W. Upton

Pricing the Internet

Pricing the Internet

Internet Demand and Supply

Q* Qfree

c*

The Internet is a wonderful idea, but it costs money to

operate. If we were smart we would charge people for using

the Internet

Pricing the Internet

Internet Demand and Supply

Q* Qfree

c*

Demand for Internet Traffic

at KSU

Pricing the Internet

Internet Demand and Supply

Q* Qfree

c*

Cost/MB sent

Pricing the Internet

Internet Demand and Supply

Q* Qfree

c*

Cost/MB sent

Where we would be if we

charged for use

Pricing the Internet

Internet Demand and Supply

Q* Qfree

c*

Cost/MB sent

Where we would be if we

charged for use

Where we are

Pricing the Internet

Internet Demand and Supply

Q* Qfree

c*

Why? Because the Internet is

free! Not surprisingly, we

get abuses

Pricing the Internet

Downloading the Latest Flick

Q* Qfree

c*

Joe College, sitting in his

dorm room, is considering

downloading a DVD of the

latest hit movie.

Pricing the Internet

Downloading the Latest Flick

Q* Qfree

c*

Joe College, sitting in his

dorm room, is considering

downloading a DVD of the

latest hit movie.

Obviously Joe is not deterred

by the law, perhaps

because he believes his chances of

being caught are small.

Pricing the Internet

Downloading the Latest Flick

Q* Qfree

c*

Joe College, sitting in his

dorm room, is considering

downloading a DVD of the

latest hit movie.

Obviously Joe is not deterred

by the law, perhaps

because he believes his chances of

being caught are small.

Legal issues aside, Joe has no incentive to economize on internet use.

Pricing the Internet

Downloading the Latest Flick

Q* Qfree

c*

Joe College, sitting in his

dorm room, is considering

downloading a DVD of the

latest hit movie.

Obviously Joe is not deterred

by the law, perhaps

because he believes his chances of

being caught are small.

Legal issues aside, Joe has no incentive to economize on internet use.

And the problem is worse. Others cannot get on because Joe is

Hogging the Internet.

Pricing the Internet

Downloading the Latest Flick

Q* Qfree

c*

Query: are people who argue for keeping the internet free guilty of promoting a crime

(illegal downloads)?

Pricing the Internet

Downloading the Latest Flick

Q* Qfree

c*

Query: are people who argue for keeping the internet free guilty of promoting a crime

(illegal downloads)?

Probably not, but the making the internet

free is directly responsible for the high level of illegal use and (in part) for ever higher

tuition charges.

Pricing the Internet

The Information Superhighway

• The Internet is called the “information superhighway” and the comparison to superhighways is apt.

Pricing the Internet

The Information Superhighway

• The Internet is called the “information superhighway” and the comparison to superhighways is apt.

• Increasingly the internet is subject to congestion, with slow access speeds at times.

Pricing the Internet

Congestion on the Internet

• University use for downloads

• Spam

Pricing the Internet

Congestion on the Internet

• University use for downloads

• Spam

A warning: downloading movies and copyrighted audio material is illegal and potentially subject

to legal penalties

Pricing the Internet

Congestion on the Internet

• University use for downloads

• Spam

A warning: downloading movies and copyrighted audio material is illegal and potentially subject

to legal penalties

But people still do it. Should we rely on fines or market

incentives?

Pricing the Internet

The Expressway at Rush Hour

ATT

MTT

Q

cTotal

cJoe

Pricing the Internet

The Expressway at Rush Hour

ATT

MTT

Q

cTotal

cJoe

The more trips, the longer the time a trip

takes

Pricing the Internet

The Expressway at Rush Hour

ATT

MTT

Q

cTotal

cJoeBut lets also look at marginal trip times.

Pricing the Internet

The Expressway at Rush Hour

ATT

MTT

Q

cTotal

cJoe

True cost is not just the time of

Joe’s trip but the time he adds to everyone else’s

trip.

Pricing the Internet

The Expressway at Rush Hour

ATT

MTT

Q

cTotal

cJoe

True cost is not just the time of

Joe’s trip but the time he adds to everyone else’s

trip.

If Joe’s 20 minute trip adds 1 second to the travel times of another 25,000 commuters, the true time cost of his trip is over seven hours.

Pricing the Internet

The Expressway at Rush Hour

ATT

MTT

Q

cTotal

cJoe

True cost is not just the time of

Joe’s trip but the time he adds to everyone else’s

trip.

If Joe’s 20 minute trip adds 1 second to the travel times of another 25,000 commuters, the true time cost of his trip is over seven hours.

This is an externality, pure

and simple.

Pricing the Internet

Ditto for the Internet

D

ATT

Q*

c*

Let’s suppose we charged people for average trip time

Pricing the Internet

Ditto for the Internet

D

ATT

Q*

c*

Pricing the Internet

Ditto for the Internet

D

ATT

MTT

Q*Q**

c*

c**

cT

Pricing the Internet

Ditto for the Internet

D

ATT

MTT

Q*Q**

c*

c**

cTWe have overuse of the internet because of the externality. People see

the average time to send a message, not the

marginal time

Pricing the Internet

The Solution: Charge

D

ATT

MTT

Q*Q**

c*

c**If the internet were

really owned, people would see the

marginal cost of sending a message.

Pricing the Internet

The Solution: Charge

D

ATT

MTT

Q*Q**

c*

c**

Pricing the Internet

Back to Joe College

Q* Qfree

c*

Our discussion of Joe did not

consider congestion charges.

Pricing the Internet

Back to Joe College

Q* Qfree

c*

Our discussion of Joe did not

consider congestion charges.

It should have

Pricing the Internet

Congestion is anti-social

ATT

MTT

Q**

cKSU

cJoe

In Fact, Joe is congesting the

information superhighway.

We don’t charge Joe for that.

Pricing the Internet

Congestion is anti-social

ATT

MTT

Q

cTotal

cJoe

It is not just that he doesn’t pay CJoe. He does not pay for the costs imposed on us while he downloads

the latest heavy metal album.

Pricing the Internet

Congestion is anti-social

ATT

MTT

Q

cTotal

cJoe

It is not just that he doesn’t pay CJoe. He does not pay for the costs imposed on us while he downloads

the latest heavy metal album.

This is environmentally

irresponsible

Pricing the Internet

SPAM America

ATT

MTT

Q

cTotal

cJoe

Pricing the Internet

SPAM America

ATT

MTT

Q

cTotal

cJoe

True cost of the message is the time added to

other messages.

Pricing the Internet

SPAM America

ATT

MTT

Q

cTotal

cJoe

True cost of the message is the time added to

other messages.

If Joe’s Spammer’s 10 million SPAM Mails adds trip

adds 0.01 second to access times of

another 25,000,000 users,

the cost of his message is enormous

Pricing the Internet

SPAM America

ATT

MTT

Q

cTotal

cJoe

Why this error? Congestion is an

externality, and Joe does not have to pay the costs he imposes

on others.

Pricing the Internet

SPAM America

ATT

MTT

Q

cTotal

cJoe

Why this error? Congestion is an

externality, and Joe does not have to pay the costs he imposes

on others.

Query: are people who argue for keeping the internet free guilty of

promoting spam?

Pricing the Internet

SPAM America

ATT

MTT

Q

cTotal

cJoe

Why this error? Congestion is an

externality, and Joe does not have to pay the costs he imposes

on others.

Query: are people who argue for keeping the internet free guilty of promoting a crime

(illegal downloads)?

Well, the mispricing is directly responsible for internet congestion and the high level of illegal

use.

Pricing the Internet

SPAM America

ATT

MTT

Q

cTotal

cJoe

Pricing works. While we grumble about junk “snail mail”, we do not have the

same problem there as with SPAM. Junk Mailers pay

for each message.

Pricing the Internet

End

©2004 Charles W. Upton