Today’s lecture in my occassional “Economics of Market Power” series comes from the hot policy debate over whether we should let dsl (and cable) providers charge third parties for “premium” speeds to reach their customers. I call this behavior “Whitacre Tiering” (as distinguished from other sorts of tiering traffic or bandwidth) in honor of AT&T CEO Ed Whitacre, a chief proponent of the concept.

Last time, I explained why permitting Whitacre tiering would be a disaster for democracy. This time, I’ll explain why Whitacre tiering produces really, really awful results from an economic perspective. It gives actors all the wrong incentives, adds new layers of uncertainty and inefficiency to the market generally, and discourages investment in bandwidth capacity at every stage of the network (thus aggravating the broadband incentives problem you may have read about recently, rather than solving it, as some defenders of Whitacre tiering maintain).

But hey, don’t blame me, I’m just the messenger! Go do the math yourselves. All you need is a basic knowledge of Econ 101. OTOH, if you have a religious belief, possibly supported by self-interest or fueled by PAC money, that all deregulation is good and all regulation is bad, mmmkay (not that Senator Enisgn is likely to ever read this), I expect you will remain unpersuaded. Rather like passionate believers in Ptolemy’s geocentric model of the cosmos, I expect the true believer neo-cons, the companies whose self-interests are implicated, and their wholly owned subsidiaries in state and Federal legislatures, to devise theoretical models and epicycles to explain away all the nasty empirical problems and assure me I live in the delightful world of competition and frictionless switching to competitors.

It moves, it moves . . . .

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