Bad Economics and Net Neutrality

I see bad economic arguments all the time in news commentary and in casual conversation. It feels to me like people are “under-theorizing” the problem. It’s not that everyone should have a rigorous mathematical model behind every piece of commentary, but a little bit of disciplined thinking could go a long way.

In discussions of net neutrality, I get the impression that people have a very crude model such as: “Internet Service Providers are monopolies, so they get to call the shots. They can throttle competitors and direct you to their partners or to their own services.” This model gets it wrong because it’s too crude. Even monopolists face a downward-sloping demand curve. They lose revenue if they set the price too high, or if they intentionally sabotage their own product in the way that neutrality advocates claim they do.

This isn’t the only example of under-theorizing. “Employers have monopsony power, so they call the shots.” is another example. Or “Employers have market power, so they can force employees to tolerate working conditions worse than what they’d actually like.” These stories are too simple. Even an employer with monopsony power (a rarity in the real world) loses out if they set the wage too low. Even an employer with some kind of market power would rather give their employees relatively cheap perks and fringe benefits rather than more money. If the employer (no matter how powerful) can provide safety features for $1 that the employee values at $3, the employer will do so. There’s no opportunity to exploit here, no matter how much power the employer has and no matter how greedy he is.

The elixir for bad economic reasoning isn’t a thorough formal model. A tiny amount of formal reasoning usually suffices. “Monetize the value of ‘directing internet users to my products’ and compare it to the monetized value of ‘making the internet more valuable by opening it up to my direct competitors’.” Or how about “Monetize the value of air conditioning and safety features that my employees value, and compare it to the extra wages I’d have to pay to make them go without.”