03 June 2009

Net Neutrality in the UK

I found this article over at Ars Technica interesting and worth reading. The article describes an ongoing "discussion" between the carrier BT and the content provider BBC. BT is using tier-based categories to implement a price discrimination. While this is normal in telecom (and arguably necessary since these industries have marginal costs below average costs), the challenge is that the consequence of this (bandwidth limitation, in this case) affects the business of content providers (in this case BBC).

What is interesting about this is that there is a problem of joint action by parties with competing interests. BT has to make substantial investments to enable access to broadband content, so it is hard to argue against their right to earn a reasonable return on this investment. At the same time, BT needs content providers (like the BBC) to develop compelling programming so that users will find it worthwhile to pay for the investment. The BBC wants to have its programming available to as many viewers as possible (to maximize their returns) at the highest quality level possible.

So, BT wants broadband prices on the higher side to maximize its benefits whereas BBC wants them on the lower side to maximize theirs. It appears that BT has set its lowest tier such that viewers can see the BBC content at its basic level of quality. Higher quality levels (which require more bandwidth) require a higher monthly fee

While I am not an economist, this seems to be a bargaining problem of the kind discussed by Oliver Williamson (and Ronald Coase, for that matter). Thus, either we see an allocation of rights and costs that is socially efficent (Coase, in the absence of transaction costs) or we see vertical integration (Williamson, in the presence of high transaction costs) or government intervention (to reduce transaction costs).

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