data. This means consumers are less willing now to give up broadband service if prices increase because they value it more highly than they had previously. In many households the cost of broadband is treated as a necessary expenditure.

Household valuations for Internet service may vary with the number of years the household has been connected to the Internet. Inexperienced households with slow-speed connections are willing to pay about $16–$17 per month for an improvement from slow to fast speed, but they do not value an improvement from fast to very fast speed. Inexperienced households with a high-speed connection are willing to pay approximately $26–$27 per month for an improvement from slow to fast speed.

To better illustrate our results, the accompanying table shows four levels of Internet service. Basic service has fast speed and less reliable service. Reliable Internet service has fast speed and very reliable service. Premium service has fast speed, very reliable service, and the ability to designate some downloads as high priority. Premium Plus service has fast speed, very reliable service, plus all other activities bundled into the service. We then assume that household valuation for a dialup-like service: less reliable, slow, and with no other special activities, is $14 per month.

The estimates shown in the table suggest the representative household would be willing to pay $59 per month for a Basic service, $79 for a Reliable service, $85 for a Premium service, and $98 for a Premium Plus service. The bottom half of the table shows that an inexperienced household with a slow connection would be willing to pay $31 per month for a Basic service, $41 for a Reliable service, $59 for a Premium service, and $71 for a Premium Plus service.

These estimates suggest the value of broadband has changed in the last decade. In 2003 the representative household was willing to pay approximately $46 per month for Reliable broadband service3 compared to about $79 in 2010. Given that the price of broadband has not changed much in this period, these estimates suggest experienced households get more for

experienced users
are more aware
of the full range
of economic,
entertainment,
information, and
social benefits
the Web has
to offer.

their money today than in the recent past. Using the language of economics, we would say that monthly consumer surplus per household has increased substantially between 2003 and 2010.

 

Policy implications

Choice experiments show that reliability and speed are important features of Internet service, but that very fast Internet service is not worth much more to households than fast service at this point in time. Using these results, we calculate that a representative household would be willing to pay about $59 per month for Basic Internet service. In contrast, an inexperienced household with a slow connection would be willing to pay about $31 per month for Basic Internet service.

One interpretation of these results
is that experienced users are more
aware of the full range of economic,
entertainment, information, and so-
cial benefits that the Web has to of-
fer. Inexperienced users may also
have less technical ability when using
high-technology goods and service.
As such, they would be relatively less
productive when using the Internet
to produce household income and/
or savings in time. The large increase
in WTP indicates the Internet is not
only becoming a much more impor-
tant part of people’s lives, possibly
because they are learning more about
its capabilities, but also that its capa-
bilities have increased through new
applications and increased reliability.

References

1. Ackerberg, D., Riordan, M., Rosston, G., and Wimmer, B. Low-income demand for local telephone service: Effects of lifeline and linkup. SIEPR Discussion Paper, 08-47. Stanford University, Palo Alto, 2009.

2. Rosston, G.L., Savage, S.J., and Waldman, D.M. Household demand for broadband Internet in 2010. The B. E. Journal of Economic Analysis & Policy 10, 1 (Advances), Article 79 (2010).

3. Savage, S. and Waldman, D. United States demand for Internet access. Review of Network Economics 3, (2004), 228–247.

 

Gregory Rosston ( [e-mail]) is the deputy director of the Stanford Institute for Economic Policy Research and the deputy director of the Public Policy program at Stanford University, Stanford, CA. Scott Savage ( [e-mail]) is an associate professor who teaches microeconomics and telecom economics at the University of Colorado at Boulder. Donald Waldman ( [e-mail]) is a professor and associate chair of the Graduate Program at the University of Colorado at Boulder.

Copyright held by author.