Data Caps Aren’t Perfect, but That’s OK

Published May 31, 2016

Last year, The New York Times criticized usage-based broadband pricing, noting that “Moving an extra gigabyte of data at off-peak times costs virtually nothing.” More recently, a report by the advocacy group Public Knowledge suggested that broadband data caps, a form of usage-based pricing, are an inefficient way to manage congestion.

These claims are correct: while monthly caps may help control congestion if they impose binding constraints on high-volume users, pricing models truly aimed at congestion would target times and areas of congestion directly. That’s why the DC Metro system manages overcrowding by charging higher fares for travel at rush hour than for travel at off-peak times when crowds tend to be small—rather than by limiting each person’s total number of monthly rides.

But the critiques miss the key point: in industries with high fixed costs and low marginal costs, aside from congestion, efficient pricing has little to do with marginal costs. Pricing at marginal cost in such industries cannot produce sufficient revenues to cover costs. Instead, efficiency in these industries requires spreading the fixed costs over as broad a customer base as possible. Efficient pricing will, in general, charge users with high demand more than users with low demand even if those users impose no additional costs on the network.

Scott Wallsten ([email protected]) is vice president for Research and Senior Fellow at the Technology Policy Institute.

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