telephone rate differentiation

Since the beginning of telephone service, telephone rates have depended on how the telephone will be used.  In the U.S. in 2007 , flat-rate single-line local telephone service for businesses was priced 90% more than the same telephone service for residential use.   The mark-up for business service over residential service has varied from 1989 to 2007.  Business service has typically been charged between 75% to 120% more than the corresponding residential service.

Business / residence rate differentiation was less about 1900.  Rates for flat-rate business local telephone service were typically 20% to 50% greater than the corresponding residential service.  Rates per local message were often the same for business and residential customers.  Different rates for residential and business customers were explained in 1902 in terms of the potentiality of the telephone:

there was a scale of graduated charges, varying with the character of the facilities provided, the length of the line required, and the amount of service rendered, so far as that was determined, so to speak, by the potentiality of the telephone; that is, whether it was at a residence or a place of business.[1]

A difference in pattern of use was also offered as an explanation:

It was felt that the more general distribution of the traffic from residence stations throughout the twenty-four hours, and the comparative freedom of this class of traffic from the liability to the violent fluctuations in volume characteristic of the service in purely business districts, justified this concession.[2]

This explanation indicates that business service had greater traffic-sensitive costs than did residential service.

Cost differences, however, are not a convincing explanation for the difference between business and residential telephone rates.  Traffic-sensitive telephone service costs, e.g. switching costs, surely have decreased relative to total telephone service costs over the past century.  Yet the markup of business telephone service over residential telephone service has roughly doubled over the past century.  Moreover, from 1989 to 2007, taxes, 911, and other charges were roughly twice as great for business telephone service as for residential telephone service.  These charges have little relation to traffic-sensitive costs.

Higher business telephone rates are probably more politically appealing than higher residential telephone rates.  Higher business telephone rates have effects that are diffused throughout the economy.  Voters pay directly higher residential telephone rates.   Business telephone rates probably rose relative to residential telephone rates over the past century via the invisible hand of the democratic process.

One interpretation of network neutrality is that network service rates should not depend on how the service is used.   Telephone rates historically have not followed such network neutrality.  The specification of acceptable  rate structures is an important and complex regulatory issue.

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Data: U.S. residential and business telephone rates, 1878 to 2007 (Excel version).  Extensive data on telephone rates, by city, c. 1912, are available in the U.S. Bureau of the Census, Special Reports, Telephones and Telegraphs, 1912 (GPO, 1915), Ch. VI.

Notes:

[1] U.S. Bureau of the Census, Special Reports, Telephones and Telegraphs, 1902 (GPO, 1906), p. 52.

[2] Id. p. 54.  The report was “prepared from data supplied by Mr U. N. Bethell, vice president and general manager of the New York Telephone Company.”  Both of the above explanations are probably from the New York Telephone Company.

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