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An Alternative To Net Neutrality

What is net neutrality?

Net neutrality is the principle that Internet service providers treat all data on the Internet equally, and not discriminate or charge differently by user, content, website, platform, application, type of attached equipment, or method of communication. For instance, under these principles, internet service providers are unable to intentionally block, slow down or charge money for specific websites and online content. This is sometimes enforced through government mandates.

What are ISPs?

Internet Service Providers (ISP's) are the businesses and organizations that provide users with Internet access and related services. These providers connect customers to customers of other service providers by way of networks.

What is a common carrier and how does it fit into discussions over net neutrality?

Common carriers are companies that have an obligation to serve all people who request their services, and carry things like passengers to telephone messages to electricity. It is widely settled in the law that the FCC has extensive power to regulate them. 

A classic example would be a railroad that offers the only method of moving from point A to point B. It might reasonably be classified as a common carrier. As a business, it may remove individuals from its services if they break its rules or disturb its customers. But then suppose that a group of people decide they want to protest the railroad and need to get from point A to point B. While the railroad may not want to give them transportation, it would be required to do so under common carrier guidelines.

If a common carrier must take all comers, it cannot be given the option to turn down individual customers: hence the FCC’s anti-blocking rules. And if the common carrier cannot exclude some customers, so too it cannot charge them rates so high that they amount to a de facto exclusion: hence the general injunction to charge only “just and reasonable rates.”

Information services are said to fall outside the category of common carrier obligations. But how should we distinguish between the two classes? As far back as 1980, the FCC administratively drew a distinction between ‘basic’ and ‘enhanced’ service, whereby only the former could be regulated under common carrier rules. The supposed ground of distinction is that information services do more than transmit information. They also supply content or the processes that transform information. Hence certain “edge providers” like Google, Twitter, and YouTube indisputably fall outside the common carrier rules.

One of the big conflicts over how to regulate the internet is over the question of whether broadband service providers should be governed under common carrier rules.

What are the possible efficiency advantages from rejecting net neutrality?

The first of these efficiency considerations is that it is a lot cheaper to operate a system that makes no pretense of putting in place the elaborate scheme of regulation that now applies to common carriers. Second, we have already had extensive experience with systems, like the internet and cell phone networks, that are not subject to direct rate regulation.

There are also social gains to the ability of carriers to prioritize and price information as they choose. Federal Express does not have a monopoly in the shipping business. In order to bolster its service, it engages in extensive forms of price discrimination. It lets its customers decide whether they want same-day, one-day, or two-day delivery, and then charges them in accordance with their preferences, with rate differentials that it sets for itself. The upshot is a wide array of services that is only possible when government does not stand between the conception and execution of a planned program. 

Product and price differentiation improve consumer welfare. Similar practices have driven success in hotels and airlines. Indeed, the forces of innovation are so great, that it may well be the case that it is better, especially in rapidly evolving industries, to forget the idea of rate regulation altogether, given that future competitors, sensing opportunity, will attack first those market niches where monopoly power still exists.

For more, read this column by Richard Epstein.