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Net Neutrality: Let’s Hold a Hearing!

By 17 August 2010 9 Comments

A consistent narrative in the Net Neutrality debate is that no one should worry about suppression of beneficial business practices because the FCC can always examine business plans case by case and allow the good ones.

This is one of the world’s truly bad ideas. A major reason for relying on the institutions of property rights and markets is to avoid dreary proceedings conducted case by case under no discernible standards.

I like to illustrate this point with an example from a field not commonly thought of as embodying property rights — airline seats, and Alfred Kahn‘s great solution to the over-booking problem:

Credit: Xeni http://www.flickr.com/photos/xeni/854483756/

The time for this scenario is sometime before 1978. Suppose I am an airline agent for a flight due to leave. It has ninety-nine seats, but we have sold one hundred tickets, so someone must be bumped. I must decide who, and I am charged with making a decision that is just and fair. Clearly this will not be easy. I must interview all one hundred passengers to determine their individual reasons for traveling and decide whose need is least worthy. Some of the passengers may lie to me, so I need to investigate suspicious stories. Perhaps each deserves a chance to investigate all the stories of all the others and to introduce evidence of lying, or to bring in witnesses as to the urgency of his or her journey. We will have hearings! They can hire lawyers! This could take a while, but who can object to delays in the name of Justice? And I am not going anywhere.

Real-life airlines are interested in quick departures more than perfect Justice, so their approach to bumping was more direct. As the agent, I would pick someone and say ‘Sorry.’ Randomness might seem fair, but there were other considerations. The prosperous-looking woman with the expensive briefcase might complain to the airline president and cost me my job. She was not in the draw for the black ball. The tough-looking gent picking his teeth with a bowie knife might impose other kinds of costs on me personally, so let’s not bump him. Airline agents were instructed in the art of choosing victims. Elderly people were regarded as less likely to make trouble, so they were a preferred category. The one certainty was that the chosen sacrifice would be angry. In an effort to avoid inflicting this pain on passengers and on themselves, the airlines tried to underbook, allowing an ample safety margin for no-shows. Often the planes took off with empty seats that could have been filled. This cost the airlines money and raised ticket prices.

The system changed in 1978 through an act of creative government. The Civil Aeronautics Board, acting at the prodding of economist Julian Simon, required airlines to institute a ‘voluntary bumping’ system. This meant that they were required to offer to pay bumpees. If the airline sells too many seats it offers money to anyone who will give up her seat on the next flight out. If not enough takers appear, the offer is raised until a sufficient number of passengers volunteer. The underlying structure of the deal is that the airline gives each ticketed passenger a property right in his seat, and if it overbooks, it buys this right back at a price satisfactory to the passenger.

The results please everyone. Almost 700,000 passengers profited from a buy-back payment in 1993. By definition, they are happy because they wanted the money more than they wanted the seat on that flight. They were also spared the ignominy of having their fate decided by the whim of airline passenger agents without knowledge of individual needs. All the people not bumped are happy, or would be if they knew of their escape. The airlines are able to increase overbooking, which raises their load factors. This makes their stockholders happy indeed. Fares have gone down, to the joy of the traveling public. Ticket agents do not get grief from bumpees, which improves their lives. Particularly vulnerable people have ceased to be special targets for bumping. No one has claimed damage from the system. The net result is that the new system of making an airline seat into property is an improvement on the old system of random bumping in every possible dimension — Justice, Economic Efficiency, Political Freedom, and Personal Autonomy — and it all results from creating a property right. Who, given the choice, would substitute a system where a passenger agent, however capable and earnest, is charged with finding ‘Justice’?”

James V. DeLong, Property Matters: How Property Rights Are Under Assault — And Why You Should Care (Free Press, 1997), pp. 49-50.

9 Comments »

  • Garrett said:

    Now HERE is a proposal I can get behind!!! The ISP’s make my right to broadband part of my property. In order to bump my priority (or filter my connection) they must compensate me for my promised allocation! This helps ISP’s maximize line capacity while also allowing for graceful recoupment during peak demand! I LIKE it a lot!

    Concept:

    Users would purchase a raw piece of the pipe. That would be THEIRS! Users would be able to allocate a “sell point” at which their broadband would be up for auction. If ever the ISP oversold its line utilization and was “overbooked” it would simply buy back the broadband it needed according to whoever was giving the best prices.

    Digital Society I have to admit I was tired of reading shill articles but this one recoups your previous transgressions. I hope you are serious about supporting this as it is genius!

  • George Ou said:

    Users owning the pipe is largely a nonstarter. But I have a much simpler solution than the one you propose and it’s free.

    ISP and ACME.com asks the customer when customer visits ACME.com the following questions.

    1. Do you want the ISP to prioritize ACME.com video above other traffic other than your VoIP and online gaming traffic even if it slows all other traffic down?
    2. If yes, would you like this to be a permanent setting?

    If you answer no to first question, they don’t bother you again and keep a neutral setting. If you answer yes to both questions, they boost it according to your wishes and don’t bother asking permission again in future.

  • Michael Baumli said:

    I like George’s Idea with the exception of “This is a permanent change”

    This should be similar to saving a password into cookie. So if the enduser decides that he was a moron and that nothing now works, he can clear his browser history and start over.

    Now we have to also consider content hosted on 3rd party sites and how that will be handled as well. I assume that the 3rd party should notify the end user of this in the same way. But this could simplify many things as well because people linking to youtube videos won’t have to continuously burden the users with “Do you want to prioritize your packets?”

    But then again, if the customer is making a decision that will affect the ISP and the content provider, should the content provider be billed for this?

  • Garrett said:

    George,

    I agree that ISP’s would be unwilling to contemplate that idea of their own free will, same as the airlines, but the government stepping in would provide the “incentive” to fix that problem.

    I could also equally get behind the dynamic QOS solution you propose and you are right in that in both its better liklihood and simplicity.

    Would the same problems arise though? If the ISP’s can make money prioritizing traffic why wouldn’t they use this opportunity to do the same (you seem to think it would be free, but someone would hove to pay)?

    Example: I just heard that the airlines are now charging extra for the first few rows in coach calling them something like “express seating” because those people tend to get priority in getting off the plane. As a result every other coach person will now be paying by not having those seats available.

    How does this QOS solution affect everyone else’s right to the pipe that they are on? If I prioritize ACME.com traffic who gets “bumped” to make way for my priority? Would it be the same “safe” targets like the elderly and poor who wouldn’t be capable of putting up a fight?

    It seems that both solutions are in the same vein but as long as the ISP’s hold the rights (and the decisions) they are going to use them for self profit. Nothing “wrong” with it per se… It’s the unregulated free market system… But someone will have to pay if no one is refereeing.

    Very respectfully,
    Garrett

  • George Ou said:

    @Michael Baumli

    Permanent is only until the end-user changes his/her mind. The user can always decide to change later through some web interface. The person in charge of paying for the broadband service would have access to this of course.

    As for who pays, I support a system where either the content provider could pay which is really an indirect payment from the end-user, or the end-user can pay directly, or the ISP can choose to offer the service as a bundled part of their service. When the content provider pays, this is typically more efficient in economic terms because it involves one bulk transaction rather than millions of ISP-user transactions which involve more administrative overhead and ultimately more cost to the end user.

    The thing that is really offensive about the Net Neutrality proposals in the FCC and congress is that they would outlaw content provider payments but not end-user pay. That means the more economically efficient model is being outlawed by Net Neutrality.

  • George Ou said:

    @Garrett

    “How does this QOS solution affect everyone else’s right to the pipe that they are on? If I prioritize ACME.com traffic who gets “bumped” to make way for my priority? Would it be the same “safe” targets like the elderly and poor who wouldn’t be capable of putting up a fight?”

    I’m talking about relates to intra-subscriber bandwidth which isn’t talking about inter-subscriber fairness. That means out of your own 6 Mbps budget, the end-user should be able to determine how it’s divided up and they should also have the power to authorize the ISP to manage it for them.

    Inter-subscriber fairness still has to be maintained such that if the ISP can only offer an average of 4 Mbps of bandwidth to their 6 Mbps customers during peak hours, then every 6 Mbps customer should get 4 Mbps.

    Lastly, someone is going to have to pay because someone has to sign the pay checks for those 400K employees and $40B/year of capex that Verizon and AT&T spends. All the dotcoms combined don’t employ that number of people or invest that much in capex. Google for example employees fewer than 20K people and spends less than $1B in capex per year.

  • Digital Society » Blog Archive » Filesharing in Underdeveloped Nations: Let’s Take from the Poor and Give to the Rich said:

    [...] I could understand this argument against copyright if it were cast in the form of saying that the transaction costs are too high, and thus put too much sand in the gears of commerce and sharing. But this is not at all the argument – in fact, the Internet is wringing transaction costs out of the system and rendering concepts such as “fair use” increasingly obsolete. Who cares whether my use of something should be classified as fair (and thus free) or not if it costs only a few cents in any case? One of the great benefits of the market, with market prices, is that it eliminates the need for complex inquiries into the nature of fairness. [...]

  • Digital Society » Blog Archive » Netflix Neutrality said:

    [...] And above all, get rid of the need for hearings. [...]

  • Danger! Kibitzers at Work | SiliconANGLE said:

    [...] And is it possible that these people simply do not understand the role of markets and payments in improving human choice and efficiency? One example of which I am fond is the decision to make bumping passengers off of overbooked flights into an economic decision, to the great benefit of all, especially the passengers. [...]

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