[NNagain] some comments on old threads on this list

[NNagain] some comments on old threads on this list

[odlyzko]

In catching up on accumulate emails, some of the early
posts on this list caught my attention, on throttling,
roles of governments and monopolies, and so on.  This
is something I have been looking at since I first got
involved in network economics in the late 1990s, and
some folks on this list might be interested in a few
comments.

First of all, although I have been a strong advocate
of net neutrality from the start, half a dozen years
before the term "net neutrality" was coined (in the 
context of considering QoS), I concluded that the argument 
for it should be more subtle than just resistance to 
discrimination.  In designing operations and pricing for 
an infrastructure, one needs to consider carefully
what that infrastructure is for, and also its costs
and benefits.  Discriminatory practices have often been
essential to the provision of a variety of goods and
services.  Since railroads have been mentioned on this
list, it might be worth recalling that one of the most
memorable descriptions was written in the 1840s by
Jules Dupuit (the most eminent of the French engineers
who were the first ones to come up with basic concepts
of microeconomics):

    It is not because of the few thousand francs which would
    have to be spent to put a roof over the third-class
    carriages or to upholster the third-class seats that some
    company or other has open carriages with wooden benches.
    What the company is trying to do is to prevent the
    passengers who can pay the second class fare from traveling
    third class; it hits the poor, not because it wants to hurt
    them, but to frighten the rich.  And it is again for the
    same reason that the companies, having proved almost cruel
    to the third-class passengers and mean to the second-class
    ones, become lavish in dealing with first-class passengers.
    Having refused the poor what is necessary, they give the
    rich what is superfluous.

(You might like to recall this the next time you board a
commercial airplane flight!)  It should be emphasized that
Dupuit was not exaggerating.  I have evidence that on some
early British railways third-class carriages had no seats
at all, and sometimes passengers had to share the space
with pigs.  (There was even a suggestion by a director
of one railway that they should send chimney sweeps with
their equipment in third-class carriages, but I have not
found any evidence that this was ever implemented.)

So discrimination was common, and was accepted, even if
reluctantly.  (And so it is today, for example in progressive
taxation, where one dollar is not the same as another, or
in tuition at American colleges, where effective prices
paid by students vary depending on their parents' incomes.)
Nowadays the phrase "charging what the traffic will bear"
has strongly negative connotations.  But in the past it
was used to mean that some goods could be charged more,
that a canal or railroad fees for carrying pottery or
steel would be more than fertilizer "could bear," so
one should not charge by weight alone.  (This, as might
be expected, led to attempts at evasion, loads of pottery
hidden underneath fertilizer, and so on.  Generations
of lawyers thrived on litigating such issues.)

It is important to remember that discrimination was not
necessarily imposed by governments (which typically imposed 
limits on it), nor was it always due to monopoly power.  As
Alissa Cooper showed in her studies of throttling by
British ISPs about a decade ago, and as was observed
on railroads in the 19th century, increased competition
often led to increased discrimination.

However, differential charging has always been a very
sensitive issue, which is why service and goods providers
have often resorted to "market segmentation," with
different qualities of service, as with railroads and
airlines.  The practices that led to the greatest
opposition were those verging on what economists call
"first degree price discrimination," where each individual
is charged the maximum that person is willing to pay.
(By sellers have always strived to approach as close
as they could to first degree price discrimination, and
with modern information technology tools that strip away
anonymity, they are getting closer.  Uber is an interest
example, but not the only one.)

That is what led to the first serious federal government
intervention in the conduct of business, the Interstate
Commerce Act of 1887.  It forbade various types of
discrimination, but not differential charging for different
types of freight, for example, as those were too important
to be abandoned.  In general, historically, discriminatory
practices have been more readily accepted when costs were
high.  I have written quite a lot about this, and perhaps
the best survey of the evidence and arguments is in the
paper "Network neutrality, search neutrality, and the 
never-ending conflict between efficiency and fairness in 
markets" which was published in Review of Network Economics
in 2009,

    https://www-users.cse.umn.edu/~odlyzko/doc/rne81.pdf

(This was, as far as I have been able to ascertain, the
first use of the term "search neutrality" in a scholarly
paper, and today search neutrality appears to be a more
pressing issue than net neutrality.)

Hence the argument for net neutrality was based not just
on a general desire for having a free Internet, but also
on the relatively low costs of this infrastructure (and 
although it might seem surprising, providing Internet service 
is very inexpensive when compared to providing rail services 
in the 19th century), and also on the value that this
infrastructure provided.  As was pointed out in a paper
at the IEEE Globecom'99 conference, "The current state and 
likely evolution of the Internet,"

    https://www-users.cse.umn.edu/~odlyzko/doc/globecom99.pdf

the main service that the Internet provided then, and, as is
finally being recognized, provides today, is low transaction
latency.  That makes it hard to implement effective non-neutral
policies.

Quite a few other papers and presentation decks on these topics
are available on my home page, and they have references to
much of the related literature.

Andrew


-------------------------------------------

University of Minnesota
Minneapolis, MN 55455

odlyzko@umn.edu       email
612-625-6413          voice phone

https://www-users.cse.umn.edu/~odlyzko

Re: [NNagain] some comments on old threads on this list

[rjmcmahon]

Thanks for this. I do hope policy makers understand that differentiated 
pricing is fundamental to markets and allows businesses to recover their 
investments. This is found almost everywhere, from Saturday night stays 
with airplane flights to mountain bikes (where the Specialized Epic 
Cross Country has price points from $6,000 to $11,00 for basically the 
same bike. https://www.specialized.com/us/en/c/epic?productfamily=Epic)

I think a major difference today, at least in developed countries, is 
that wealthier people aren't motivated by fear but more by status. So we 
don't need to put poor people in a stowage class anymore to get to 
differentiate pricing. Wealthier people (and some members of SCOTUS) 
desire a "higher class" status and will pay for that status (or have 
their benefactors pay for it.) The wealthier typically have to go early 
and pay more. True for the Model T, computers, etc. Those higher prices 
help pay off the investment. No early adopters then no early majority 
and no late majority.

Regulators serve the majority by assisting with differentiated pricing 
which seems counterintuitive to many (which I think was your point.)

Bob
> In catching up on accumulate emails, some of the early
> posts on this list caught my attention, on throttling,
> roles of governments and monopolies, and so on.  This
> is something I have been looking at since I first got
> involved in network economics in the late 1990s, and
> some folks on this list might be interested in a few
> comments.
> 
> First of all, although I have been a strong advocate
> of net neutrality from the start, half a dozen years
> before the term "net neutrality" was coined (in the context of
> considering QoS), I concluded that the argument for it should be more
> subtle than just resistance to discrimination.  In designing
> operations and pricing for an infrastructure, one needs to consider
> carefully
> what that infrastructure is for, and also its costs
> and benefits.  Discriminatory practices have often been
> essential to the provision of a variety of goods and
> services.  Since railroads have been mentioned on this
> list, it might be worth recalling that one of the most
> memorable descriptions was written in the 1840s by
> Jules Dupuit (the most eminent of the French engineers
> who were the first ones to come up with basic concepts
> of microeconomics):
> 
>    It is not because of the few thousand francs which would
>    have to be spent to put a roof over the third-class
>    carriages or to upholster the third-class seats that some
>    company or other has open carriages with wooden benches.
>    What the company is trying to do is to prevent the
>    passengers who can pay the second class fare from traveling
>    third class; it hits the poor, not because it wants to hurt
>    them, but to frighten the rich.  And it is again for the
>    same reason that the companies, having proved almost cruel
>    to the third-class passengers and mean to the second-class
>    ones, become lavish in dealing with first-class passengers.
>    Having refused the poor what is necessary, they give the
>    rich what is superfluous.
> 
> (You might like to recall this the next time you board a
> commercial airplane flight!)  It should be emphasized that
> Dupuit was not exaggerating.  I have evidence that on some
> early British railways third-class carriages had no seats
> at all, and sometimes passengers had to share the space
> with pigs.  (There was even a suggestion by a director
> of one railway that they should send chimney sweeps with
> their equipment in third-class carriages, but I have not
> found any evidence that this was ever implemented.)
> 
> So discrimination was common, and was accepted, even if
> reluctantly.  (And so it is today, for example in progressive
> taxation, where one dollar is not the same as another, or
> in tuition at American colleges, where effective prices
> paid by students vary depending on their parents' incomes.)
> Nowadays the phrase "charging what the traffic will bear"
> has strongly negative connotations.  But in the past it
> was used to mean that some goods could be charged more,
> that a canal or railroad fees for carrying pottery or
> steel would be more than fertilizer "could bear," so
> one should not charge by weight alone.  (This, as might
> be expected, led to attempts at evasion, loads of pottery
> hidden underneath fertilizer, and so on.  Generations
> of lawyers thrived on litigating such issues.)
> 
> It is important to remember that discrimination was not
> necessarily imposed by governments (which typically imposed limits on
> it), nor was it always due to monopoly power.  As
> Alissa Cooper showed in her studies of throttling by
> British ISPs about a decade ago, and as was observed
> on railroads in the 19th century, increased competition
> often led to increased discrimination.
> 
> However, differential charging has always been a very
> sensitive issue, which is why service and goods providers
> have often resorted to "market segmentation," with
> different qualities of service, as with railroads and
> airlines.  The practices that led to the greatest
> opposition were those verging on what economists call
> "first degree price discrimination," where each individual
> is charged the maximum that person is willing to pay.
> (By sellers have always strived to approach as close
> as they could to first degree price discrimination, and
> with modern information technology tools that strip away
> anonymity, they are getting closer.  Uber is an interest
> example, but not the only one.)
> 
> That is what led to the first serious federal government
> intervention in the conduct of business, the Interstate
> Commerce Act of 1887.  It forbade various types of
> discrimination, but not differential charging for different
> types of freight, for example, as those were too important
> to be abandoned.  In general, historically, discriminatory
> practices have been more readily accepted when costs were
> high.  I have written quite a lot about this, and perhaps
> the best survey of the evidence and arguments is in the
> paper "Network neutrality, search neutrality, and the never-ending
> conflict between efficiency and fairness in markets" which was
> published in Review of Network Economics
> in 2009,
> 
>    https://www-users.cse.umn.edu/~odlyzko/doc/rne81.pdf
> 
> (This was, as far as I have been able to ascertain, the
> first use of the term "search neutrality" in a scholarly
> paper, and today search neutrality appears to be a more
> pressing issue than net neutrality.)
> 
> Hence the argument for net neutrality was based not just
> on a general desire for having a free Internet, but also
> on the relatively low costs of this infrastructure (and although it
> might seem surprising, providing Internet service is very inexpensive
> when compared to providing rail services in the 19th century), and
> also on the value that this
> infrastructure provided.  As was pointed out in a paper
> at the IEEE Globecom'99 conference, "The current state and likely
> evolution of the Internet,"
> 
>    https://www-users.cse.umn.edu/~odlyzko/doc/globecom99.pdf
> 
> the main service that the Internet provided then, and, as is
> finally being recognized, provides today, is low transaction
> latency.  That makes it hard to implement effective non-neutral
> policies.
> 
> Quite a few other papers and presentation decks on these topics
> are available on my home page, and they have references to
> much of the related literature.
> 
> Andrew
> 
> 
> -------------------------------------------
> 
> University of Minnesota
> Minneapolis, MN 55455
> 
> odlyzko@umn.edu       email
> 612-625-6413          voice phone
> 
> https://www-users.cse.umn.edu/~odlyzko
> 
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