5 things OTI gets wrong about data caps. Including using the term “data caps.”

[Commentary] Earlier in July, the New America Foundation’s Open Technology Institute (OTI) released a short paper attacking usage-based broadband pricing. Provocatively entitled “Artificial Scarcity,” it purports to show “how data caps harm consumers and innovation.” But the report is short on evidence in support of its proposition, and overall it fails to present a balanced view of various broadband pricing strategies. While there are several points worth discussing, I will focus on five key errors:

Error 1: Using the term “data caps”: As an initial matter, the report leans heavily on the loaded term “data caps,” which is something of a misnomer. While there may be some Internet service providers that terminate a customer’s service upon reaching a monthly data threshold, most usage-based pricing plans may be more accurately described as “pay-for-what-you-use” plans.
Error 2: Thinking of fixed and wireless broadband markets as one and the same: OTI’s report commits a fundamental error endemic in broadband policy discussions: it conflates fixed and wireless broadband markets.
Error 3: Assuming that low-income households will be especially harmed by usage-based pricing: OTI argues that charging according to use disproportionately harms low-income and minority households, as they are more likely to rely on smartphones as their primary Internet access point. But the report itself shows otherwise.
Error 4: Perpetuating the myth of “artificial scarcity”: Fundamentally, the report’s basic claim that carriers create “artificial scarcity” though usage-based pricing is flawed. Even assuming a carrier would restrain capacity to charge supra-competitive prices, most economists would explain that it could only sustain this practice if it has market power.
Error 5: Concluding that revenue growth indicates a market failure: Similarly, OTI’s report suggests it is problematic that average revenue per user for retail postpaid data rose from 2009 to 2012.

Usage-based pricing may not be ideal for all network operators. The OTI report shows that most high-capacity fixed networks such as Comcast and Verizon have moved away from the practice. But as we’ve written before, it can help alleviate congestion on capacity-constrained networks and can allow for more efficient pricing, potentially narrowing the digital divide by allowing for lower-priced entry-level broadband plans. Trumped-up concerns about “artificial scarcity” should not drive a per se ban on a potentially consumer-friendly pricing model.

[Daniel Lyons is an associate professor at Boston College Law School]