George S. Ford of the Phoenix Center asserted in effect, that as an externality, network congestion is caused among crowded customers and their overuse of underpriced bandwidth. From this he concludes that the alleviation of congestion by a broadband provider generates economic benefit via the elimination of the externality, a cost on all customers, and further that the provider has no particular strategic incentive to exploit conditions of congestion since externality reduction by definition benefits customers rather than the company.

He has it backwards. In this case, congestion is exactly a strategic phenomena between the company and its customers, and does not reflect typical conditions of congestion among only customers like traffic jams or overcrowded free public parks.

Is bandwidth underpriced and if so, how would it create such an externality?

When Comcast markets bandwidth, it does intentionally underprice it by virture of overstating its availability with an “up to” maximum but no “at least” minimum. In theory, as long as customers don’t experience chronic congestion or blocking, they could still get what they pay for, no matter how large the difference between potential and actual bandwidth use. For Comcast, it’s an economic incentive to minimize cost and maximize revenue and profit by loading up the system with these customers as close to the point of congestion as it can get without going past it.

Here’s where Ford’s “externality” backfires. Once congestion occurs, bandwidth is effectively overpriced in the sense that the service is degraded at a lower quality level for the same price paid. But Ford and others insist the opposite, that from a falsely characterized “all you can eat” pricing model, bandwidth is underpriced at zero for the marginal GB consumed in peak, which therefore is posed to drive aggregate consumption past the point of congestion.

This is a Catch-22 pricing model. Service X is sold for price Y available for Z use between zero and a maxmum, for which the provider can restrict use down to zero if necessary to control congestion. There’s no externality here. Service X has a price for any range of Z use between zero and a maximum. That’s the TOS.

The use of service X may or may not contribute to congestion in the aggregate. If it doesn’t, it’s not called an “externality”, and if it does, it is. How much use of X above zero Z use causes congestion? … It’s a mystery … Comcast will let you know, and when it does, opponents of net neutrality like Ford will chime in and call it an externality.

As long as the provider maintains enough network bandwidth capacity to avoid congestion, it can claim the bandwidth was not “oversold” or “underpriced” from the perspective of an individual customer who is never blocked or experiences congestion. But once congestion occurs, it is characterized mistakenly as an “externality” by Ford and others when in fact, it’s a forced degradation of service by virtue of an intentional undersupply of bandwidth maintained by a combination of underinvestment coupled with discriminatory restrictions on its use.

How would net neutrality solve this problem? At one level it would require transparency and at another level, it would require all sources of congestion to be treated equally via pricing, non-price rationing and TOS, like it is in genuinely competitive markets without externalities.