Flat Versus Metered Rates, Bundling, and ‘Bandwidth Hogs’
University of Minnesota - Twin Cities - School of Mathematics and Digital Technology Center
University of Minnesota - Twin Cities - Department of Applied Economics
University of Minnesota - Twin Cities
May 2, 2011
Proceedings of NetEcon 11: 6th Workshop on the Economics of Networks, Systems, and Computation
The current push for bandwidth caps, tiered usage pricing, and other measures in both wireless and wireline communications is usually justified by invoking the specter of “bandwidth hogs” consuming an unfair share of the transmission capacity and being subsidized by the bulk of the users. This paper presents a conventional economic model of flat rates as a form of bundling, in which consumption can be extremely unequal, and can follow the ubiquitous Pareto distribution. For a monopoly service provider with negligible marginal costs, flat rates turn out to maximize profits in most cases. The advantage of evening out the varying preferences for different services among users overcomes the disadvantage of the heaviest users consuming more than the average users. The model is tractable enough that it allows for exploration of the effects of non-zero marginal costs (which in general strengthen the case for metered pricing), and of welfare effects.
Number of Pages in PDF File: 10
Keywords: flat rates, bundling, usage sensitive pricing
JEL Classification: D42, D49, L11, L96Accepted Paper Series
Date posted: May 4, 2011 ; Last revised: February 27, 2012
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