Flat rate is a method of pricing in which a fixed rate is charged for a given service, regardless of usage.
The most common method currently used for Internet access is flat rate pricing. Under this scheme, users pay a flat fee, usually monthly, which allows them to have unlimited access to the Internet at a particular service level. For example, one might pay $19.95 a month to be connected to an Internet Service Provider (ISP), which allows the customer unlimited use at whatever speed the ISP supports. Flat rate pricing essentially offers “best efforts” service for all users. When the network is uncongested, there is negligible waiting time and all information is transmitted instantaneously. When there is a high level of usage, however, flat rate pricing cannot discriminate between users, and all customers are subject to the same level of delays and loss in service quality. In some applications, delay in transmission might have little effect (e.g., e-mail); but, applications such as real-time video or audio streams can suffer greatly due to delayed or dropped packets.
Proponents of flat-rate pricing argue that such a mechanism is more convenient for both consumers and providers in that it simplifies accounting issues, as well as encouraging usage. Furthermore, flat-rate pricing provides a guaranteed revenue stream with which ISPs can recover the high sunk costs associated with developing the infrastructure of the network. Unfortunately, the conveniences that come with flat-rate pricing also correspond to several elements that can cause inefficiencies. First, and most obvious, the flat price does not induce users to take into account the congestion costs (an externality) that they impose on other users during peak periods. Given that users are charged the same price to send data regardless of when the data is sent (essentially nothing, given that they have paid for access already), each user is faced with the classic prisoner’s dilemma problem: individuals would be happier if others stayed off the network during periods of congestion, but each user would prefer to send their transmission and wait a bit, rather than get off the [[network] altogether. As a result, as one would expect, users continue to log onto the network, even in periods of high congestion, causing degradation in service quality.
- ↑ This does not imply that other pricing systems would fail to provide “best efforts” in terms of the transmission path chosen and guarantee of delivery. Rather, it means that other pricing mechanisms, in differentiating between packets, could possibly provide those users who pay higher prices with a higher quality of service than that which they receive when all packets are treated equally (which is commonly the case under a flat-rate pricing regime).
- ↑ Because it is essentially costless to provide access to a user once the infrastructure is developed, charging the marginal cost of production of access (which is conventionally associated with the “efficient” competitive outcome) would lead to a price necessarily equal to zero. Unfortunately, such a scheme makes it impossible to ever recover the costs expended by developing the network.
- ↑ When AOL switched from usage-sensitive pricing to flat-rate pricing in 1996, users flooded the system, at times leaving their connections on unattended; leading to excessive delays and, at times, complete system breakdown.
- Economic Perspectives on the Internet, at 10-11.