How to price internet services

The Internet is a world-wide network of computer networks that use a common communications protocol, TCP/IP (Transmission Control Protocol/Internet Protocol). TCP/IP provides a common language for inter operation between networks that use a variety of local protocols. To support such a system, two costs are involved. One is to maintain the routing table, to specify the path that information packets need to travel, to reach from the source to the destination. Keeping these tables organized and up-to-date is not a trivial task. Second issue facing the internet usage is the speed of service that is to be provided, and at what price should such a service be charged.

Using improper judgments in such a situation can lead to bottleneck formation as various sub-networks have essentially different bandwidth. Also a key issue in the pricing is the amount of information exchange that is to be charged by the service provider.
Standard economic theory suggests that prices should be matched to costs. There are three main elements of network costs: the cost of connecting to the net, the cost of providing additional network capacity, and the social cost of congestion. This paper studies the costs and pricing policies that are being followed by the service providers and makes suggestions on the same. As discussed before, since pricing is a key issue, and to do so, a few guidelines are being followed by the service providers of this system, which are as follows:

  • Flat-rate pricing: Currently, most Internet users pay a fee to connect while they are not billed for each bit sent. Billing is done on the time the connection stays live. For example, even today, in India, users of the internet using a dial up connection, as is provided by “BSNL”, is charged on the basis of the time that the connection stays alive, and not on the data volume exchange.
  • Usage-sensitive pricing: Users pay a portion of their Internet bill for a connection, but not on how many times the connection is activated and a portion for each bit sent and/or received. The marginal monetary cost of sending or receiving another bit is non-zero during the time period. This is again evident by the services provided by the broadband service provider who charges on the basis of information volume exchanged, say in terms of megabytes or gigabytes, and not on the time the connection stays online.
  • Transaction-based pricing: Like usage-sensitive pricing, the marginal monetary cost of sending and/or receiving another bit is non-zero. However, the prices are determined by the characteristics of the transaction and not by the number of bits. This type is yet to gain popularity in India.

Again the type of pricing will be best judged by the consumers of the service. Effectively they will decide the level of speed of service they require and what policy effectively suits their usage. Often the viability of the services will be a key factor in the decision process, since it may not be often be possible in case of deciding the pricing policy, how to estimate the cost driver, say in case of flat rate pricing, how long the connection was online, or for usage sensitive pricing, what volume of data exchange has actually taken place. Network statistics collected for the same has more often than not, indicated very irregular usage patterns.
Since today, the internet has become an indispensable commodity of our life and business, a lot of research based on economics is needed to be done, so that more efficient models may be devised to actually give suitable incentives to the end user to shift to a better service, and to upgrade the technology of service providing, that of broadband. As of now, since the industry is in its nascent stage, the economics are yet to be applied to it. But ultimately, for this fast growing business to survive, economics is the key, and so is research in the same field to actually understand a lot of other issues too, that are facing the internet, from bundling of information data, to providing incentives to manufacture information by providing suitable incentives and intellectual copyrights. As such, since it is a new field, a lot of study is yet to be done on the same for this fast development to be sustainable in the long run.

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Author: Kar

Dr. Kar works in the interface of digital transformation and data science. Professionally a professor in one of the top B-Schools of Asia and an alumni of XLRI, he has extensive experience in teaching, training, consultancy and research in reputed institutes. He is a regular contributor of Business Fundas and a frequent author in research platforms. He is widely cited as a researcher. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.