Computer Networks, Vol. 36, pp. 493-517, 2001
8 Pages Posted: 7 Aug 2000 Last revised: 7 Jun 2014
Date Written: February 26, 2012
There are repeating patterns in the histories of communication technologies, including ordinary mail, the telegraph, the telephone, and the Internet. In particular, the typical story for each service is that quality rises, prices decrease, and usage increases to produce increased total revenues. At the same time, prices become simpler.
The historical analogies of this paper suggest that the Internet will evolve in a similar way, towards simplicity. The schemes that aim to provide differentiated service levels and sophisticated pricing schemes are unlikely to be widely adopted.
Price and quality differentiation are valuable tools that can provide higher revenues and increase utilization efficiency of a network, and thus in general increase social welfare. Such measures, most noticeable in airline pricing, are spreading to many services and products, especially high-tech ones. However, it appears that as communication services become less expensive and are used more frequently, those arguments lose out to customers' desire for simplicity.
Flat rates are the simplest form of pricing. Although they have generally been regarded as irrational, and economically and socially undesirable, they have serious advantages. Consumers like them, and are willing to pay extra for them. Further, flat rates are extremely effective in stimulating usage, which is of advantage in a rapidly growing service like the Internet.
JEL Classification: M20
Suggested Citation: Suggested Citation
Odlyzko, Andrew, Internet Pricing and the History of Communications (February 26, 2012). Computer Networks, Vol. 36, pp. 493-517, 2001. Available at SSRN: https://ssrn.com/abstract=235283 or http://dx.doi.org/10.2139/ssrn.235283