95th Percentile = Lame

Tue Jun 5 02:36:00 UTC 2001

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 at research.att.com
AT&T Labs - Research                                voice:  973-360-8410 
http://www.research.att.com/~amo                    fax:    973-360-8178
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