Using Price Discrimination to ensure Net Neutrality

The main reason that telecom companies are unable to ensure higher profits is essentially a pricing problem and the answer would lie in using price discrimination and charging higher for data.

Airtel claims that its revenues are falling due to free internet based services like Skype and Viber. It feels that it is missing out on its share of the pie as people can call each other for no charge using their data packages. To grab their ‘fair’ share, they want to charge the internet companies for allowing their service through their networks. This is a critical blow to net neutrality. However, if they are truly worried about their profits, they can instead resort to pricing their data services higher by using price discrimination.

The new plan proposed by the TRAI backed by Airtel and co. is trying to create a scenario where producers are given preferential treatment. The plan proposes that sellers can pay the internet service providers to ensure that their products get priority over other products. In essence, the data packets that come from their servers should be given precedence over the data packets coming from their competitors. It is this that has been driving the internet activists over the wall, as it breaks the quintessential property of the internet: that of being neutral. Lots of other writers have spoken about how the absence of net-neutrality will throttle small start ups. Others have addressed this issue in terms of the detrimental effects on our national interest. Most of them, though, take issue with the impingement on their personal liberty. If my service provider makes a deal with a company, agreeing to prioritize its data compared to its competitors, I am being robbed of my choice. The prioritization by the service provider is making a choice on my behalf.

The main reason that is given for pushing discriminatory internet services is that the revenues of the telcos are falling: they have previously invested a lot in buying spectrum, investing in infrastructure, etc, but are finding that their main voice and messaging services are being replaced by internet companies who offer the same services for free through the telcos’ infrastructure.

The numbers on the balance sheets of the telcos suggest that the revenues are far from falling. It has seen steady growth in the past few years and what’s more, there is ample scope for them to tap into the ever growing market of mobile internet users. Then, we can assume that they are normal companies wanting more profits through vertical collusion and cartelization. The reason they have not been able to profit as much as they want from the data services that they provide is essentially a pricing problem. If they felt that the internet services like Skype or Whatsapp were free riding on their data, they can easily increase the amount they charge for data. The reason that the telcos are not increasing their prices is perhaps because of the competition between themselves. Despite the market having few sellers, they face an elastic demand curve, where the slightest increase in prices will drive users to other competitors. This is basic market mechanics based on the Bertrand model of competition.

SECOND DEGREE PRICE DISCRIMINATION

The telcos can practice a form of reverse second degree price discrimination. Price discrimination is a concept in economics which refers to the act of charging different prices for similar or same goods to different consumers. There are various types of price discrimination that is followed in the market – based on geographical location, based on income elasticity of demand, based on the quantity bought and so on. When the price charged is based on the quantity bought, it is known as second degree price discrimination. It basically refers to the discount one gets with bulk purchases. However, the telcos can practice reverse second-degree price discrimination, where they charge lower prices for lesser usage and a progressively higher price for large data consumption.

This will ensure that VoIP services, which uses a lot more data is charged higher, as against text only messaging services. This scheme is still neutral in the sense that differential rates are being applied based on quantity and not on type of service. However, the solution of a blanket ban on prioritizing certain services might reduce economic freedom of the consumer. If service based discrimination has to be made, the choice has to be with the consumer. If a person runs his business solely based on international VoIP calls and doesn’t mind paying extra for ensuring reliability and speed, he should be able to access that privilege. Or, for that matter, a Facebook or Twitter addict who wants these apps to be quick such that they can post real time selfies, should be able to choose these apps over say, apps which give real time updates on political happening in Nicaragua. Thus, people can be given a choice as to which data packets have to be prioritized within their limited bandwidth. This will ensure that there is a high degree of net-neutrality, while ensuring economic freedom to the individual consumer.

Anupam Manur is a Policy Analyst at Takshashila Institution and can be reached on Twitter @anupammanur

 

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