Price Discrimination in Internet Usage

Former Chief Economist at the US DOJ has estimated demand for Internet usage by looking at how much consumers cut back when they are near their monthly limits. Here are the intuitive findings:

• We find that subscribers’ willingness-to-pay for speed is heterogeneous, which is intuitive given the different ways in which people use the internet.  

• marginal content has relatively low value. 

• On the other hand, the infra-marginal value of content is high.  ["inframarginal" is econ speak for other uses]

These conditions suggest that price discrimination would be a good way for providers (like Google Fiber) to make sure that low value uses do not crowd out higher valued uses, and to earn enough to build capacity where demand is high:

• We find that usage-based pricing is effective at lowering usage without reducing subscriber welfare significantly, relative to a world with just unlimited plans. This is driven directly by our finding that marginal content is not very valuable and that subscriber welfare is mainly driven by infra-marginal usage.