Flat Versus Metered Rates, Bundling, and “Bandwidth Hogs”

The current push for bandwidth caps, tiered usage pricing, and other measures in both wireless and wireline communications is usually justified by invoking the specter of “bandwidth hogs” consuming an unfair share of the transmission capacity and being subsidized by the bulk of the users. This paper presents a conventional economic model of flat rates as a form of bundling, in which consumption can be extremely unequal, and can follow the ubiquitous Pareto distribution. For a monopoly service provider with negligible marginal costs, flat rates turn out to maximize profits in most cases. The advantage of evening out the varying preferences for different services among users overcomes the disadvantage of the heaviest users consuming more than the average users. The model is tractable enough that it allows for exploration of the effects of non-zero marginal costs (which in general strengthen the case for metered pricing), and of welfare effects.