Internet Pricing and Network Neutrality : How Internet Pricing Schemes Affect the Incentives of Internet Service Providers

Exponential growth of data packets and the related rising costs of network operations have brought with them the issues of network neutrality and Internet pricing. So far, Internet pricing schemes have not been considered seriously in the network neutrality literature. In order to show the importance of pricing schemes, we compare Internet service provider (ISP) discrimination incentives under two different pricing schemes: flat-rate pricing and usage-based pricing. We found that applying different pricing schemes results in a significant change in ISP discrimination incentives. Under a flat-rate pricing scheme, the ISP generally has an incentive to discriminate against certain content providers' packets by increasing the packet delay. However, under a usage-based pricing scheme, the ISP has no incentive to discriminate against packets. There are two key policy implications drawn from the results. One is that Internet pricing should be considered a prime concern in network-neutrality regulations. The other is that switching pricing schemes from flat-rate to usage-based can be considered a method of network neutrality regulation