Internet pricing and the history of communications

There are repeating patterns in the histories of communication technologies, including ordinary mail, the telegraph, the telephone, and the Internet. In particular, the typical story for each service is that quality rises, prices decrease, and usage increases to produce increased total revenues. At the same time, prices become simpler. The historical analogies of this paper suggest that the Internet will evolve in a similar way, towards simplicity. The schemes that aim to provide differentiated service levels and sophisticated pricing schemes are unlikely to be widely adopted. Price and quality differentiation are valuable tools that can provide higher revenues and increase utilization efficiency of a network, and thus in general increase social welfare. Such measures, most noticeable in airline pricing, are spreading to many services and products, especially high-tech ones. However, it appears that as communication services become less expensive and are used more frequently, those arguments lose out to customers’ desire for simplicity. In practice, user preferences express themselves through willingness to pay more for simple pricing plans. In addition, there is a strong “threshhold” effect to usage-sensitive billing. Even tiny charges based on utilization decrease usage substantially. In a rapidly growing market, it is in the service providers’ interest to encourage usage, and that argues for simple, preferably flat rate, pricing. Historical evidence suggests that when service costs decrease, such arguments prevail over the need to operate a network at high utilization levels and to extract the highest possible revenues.