The discussion over the last few days has been fascinating. I would like to inject a few remarks. The main one is that there is a huge literature on pricing of communication services and other utilities. The problem is that statements such as
Ideally, the price should match as closely as possible the actual cost to provide the service.
are very appealing, and even agree with conventional economic doctrine, but founder on the difficulty of determining what "the actual cost to provide the service" is. In addition, there are other conventional economic arguments that say prices should match not costs, but rather willingness to pay. Electricity pricing, which has been mentioned here several times, is an interesting case. Original pricing was flat rate (so many dollars or cents for each lightbulb for each month). That was discarded very quickly, largely because of a crucial factor that distinguishes electricity production from telecommunications, namely high marginal costs. Except for hydro (and to some extent nuclear) power, there is a measureable and substantial cost in paying for the fuel that provides each kilowatt-hour of "juice." Even that, though, does not deal with the issues of fixed costs (the generating plant and the transmission lines). How to allocate those costs to various consumers led to extensive discussions and experimentation about a century ago, far more sophisticated than anything that was done in telecommunications at that time or even now. What we have today is usually a combination of fixed rates (dependent on capacity of link) and usage charges (straight fees per kilowatt-hour). Experiments with time-of-day pricing have had mixed outcomes, and there is little of it going on. This might change with smarter appliances, but then it might not. The Internet does not have the high marginal costs that electricity involves. Hence the economic case is different, but even so, theory does not provide an unambiguous answer as to what the answer is. I have several papers that discuss pricing of Internet and other communications (and even more general) services. As a result of the investigations described in those papers, I do come down on a particular side of the debate (namely in favor of flat rates), but also provide extensive references for other arguments. There is a short, 6-page extended abstract entitled "Internet pricing in light of the history of communication," <http://www.research.att.com/~amo/doc/history.communications1.pdf>, (to appear in Proc. ITCom 2001), the full 40-page paper "Internet pricing and the history of communications," <http://www.research.att.com/~amo/doc/history.communications1b.pdf>, to appear in "Computer Networks," and a longer yet and more detailed 160-page manuscript "The history of communications and its implications for the Internet," <http://www.research.att.com/~amo/doc/history.communications0.pdf>. (Replace .pdf in the URLs above with .ps if you are a fan of PostScript.) These might provide some amusement and possibly even enlightenment. Andrew Odlyzko ************************************************************************ Andrew Odlyzko amo@research.att.com AT&T Labs - Research voice: 973-360-8410 http://www.research.att.com/~amo fax: 973-360-8178 ************************************************************************