Broadband usage caps are probably inefficient

[Commentary] In Slate, Eli Dourado has a post in support of Comcast’s move to cap broadband usage at 300GB per month unless you want to pay $10 for a little more or $30 for unlimited. I have played the "rational economist explains to consumers why a restriction is good for them card" more times than I can count and Dourado has set himself up nicely for a shellacking. While he has a point, I think it is only part of the story and that he is likely on the wrong side of the argument in a historical sense.

The problem is that this logic rests on there being a competitive market and US broadband does not look that competitive to me. While Dourado’s argument still holds for a monopolist, an Internet service provider (ISP) with market power is going to find it worthwhile to squeeze consumers more to get them to pay more. Specifically, the function that relates charges to download limits is going to be much steeper than it would be if there was a pure cost-recovery thing going on. This was the finding in a paper by Economides and Hermalin that took into account the features that Dourado focussed on. Yes, the ISP will install more bandwidth but it will also cap usage more stringently than would be efficient in a social sense.