The Broadband Price
is Not right
Developing an effective pricing index is essential to understanding
the value of broadband connectivity.
HoW MuCh shouLd subscrib- ers pay for broadband? Without a sound economic benchmark, it is difficult o tell if the old expression
“whatever the market will bear” is too
high. We need a good benchmark, but
we do not have one.
Why do we need one? Consider recent experience. In September 2001,
approximately 45 million U.S. households accessed the Internet through
a dial-up connection, while only 10
million used a broadband connection.
By March 2006, the situation was moving to the opposite: Approximately 47
million households (and growing) had
broadband connections, while 34 million (and declining) used dial-up connections. According to the latest survey of the Pew Internet and American
Life Project, in April, 2009, less than
10% of U.S. households had dial-up
Internet connections, and 63% of U.S.
households had broadband.
iLLUStration by gLUeKit
What happened to the price of
broadband during and after that
deployment? In our study, “The
Broadband Bonus: Accounting for
Broadband Internet’s Impact on U.S.
w14758, Ryan McDevitt and I inquired into broadband’s value. We approached this question from a novel
angle. We asked: “How fast would
prices have to come down to reflect the
value created from the replacement of
dial-up access with broadband?”
What was so novel about that question? While answering that question
we strictly followed the standard procedures used by the U.S. Bureau of
Labor Statistics (BLS) to estimate the
Consumer Price Index (CPI).
We had several reasons for doing
this. First, the consumer price index
is the primary measure of inflation in
the U.S.—for example, the Social Security Administration uses it to adjust
its checks. However, economists have
long suspected the CPI index contains
biases. Many years ago those suspi-
cions were confirmed in integrated
circuits and personal computers, as
well as in cellular telephony. Accordingly, measurement procedures in
those markets changed.
Should broadband change too? It is
a big and open question because nobody has yet estimated the size of the
bias (if any). Governments in the developed world use procedures similar
to those used in the U.S. If U.S. statistics contain a bias, it is also likely in
A big policy issue also motivated us.
Price indices can measure improvements (or not) in competitive perfor-