A Most Egregious Act? The Impact on Consumers of Usage-Based Pricing

In this Perspective, I review arguments that broadband providers may be anticompetitively imposing usage-based pricing to protect their profits from “core” services (e.g., voice, video, texting) against the proliferation of “over the top” services and, as such, new price regulation of broadband services may be warranted by the Federal Communications Commission to address such pricing practices. Using a very simple economic example, I show that that charging a positive price to account for the substitution of over-the-top video services for the broadband provider's own “core” services can make consumers and society better off. Consequently, regulations that prohibit such actions can make consumers and society worse off. Indeed, I also demonstrate that it is not difficult to show that prohibiting this practice can harm consumers and reduce economic welfare. In particular, I show that a prohibition of usage based pricing may force some consumers to pay more for services they do not want or use, while others are allowed to pay less for services they do. The prohibition, in effect, results in a transfer of wealth from one group of consumers to another, and reduces profits. Overall consumer welfare may be diminished, even though some consumers are better off. Accordingly, given numerous valid reasons for usage-based pricing, the positive case for regulatory intervention is weak