the upgrade provided a benefit “
equivalent” to a decline in price of $15.35,
or a 30% decline.
The last row in the table illustrates
our study’s estimate of a price index
adjusted for upgrades. We follow
the norms for a transactional index.
Because only a small percentage of
households a year upgraded to broadband, a price index that emphasizes transactions cannot give a huge
weight to the upgrades in any given
year. Upon initial assessment the
gains appear modest even in our largest estimate, displayed in the last row
of the table, around 2.2% decline per a
year, each year prior by 2006.
Yet, it adds up over time. By 2006 the
price index should have declined 16.4%
more than it did (( 73. 1 – 63. 1)/73.1).
Our study experimented with many
other different ways to count it. Depending on how it is counted, we estimate that somewhere between 4. 8 and
6. 7 billion dollars of benefit went uncounted in 2006 alone.
Notice one other feature. Our new
estimate displays a big difference in
the timing of the recorded price decline. Accounting for the upgrade
when users upgraded would have realized the benefits several years sooner
than BLS recorded in its official index.
Overall, our study suggests there
are many unresolved issues in the
price indices for a wide range of improving electronic goods where users
realize discrete gains from upgrading
to a new good. After all, broadband is
far from the only improving service
a user can upgrade. What was true
of broadband is likely to be true for
smartphones, Netbooks, digital cam-corders, and even digital advertising.
BLS has its hands full.
Our study also illustrates why a price
index constructed for the CPI does not
necessarily meet the needs of a policymaker interested in broadband policy,
such as the Federal Communications
Commission (FCC). We considered the
gains from retirement of second phone
lines at households. Once again, we experimented with numerous ways to estimate the gains from such retirement.
We found that the savings on a second
phone line accounts for anywhere
from 30%–40% of the total savings in
how fast would
prices have to
come down to reflect
the value created
from the replacement
of dial-up access
2002–2006, or 21%–28% of the savings
for 1999–2006. However, BLS price indices do not normally count the savings of expenditure in one category (on
a second telephone line) as an input
into calculating the price index for another (Internet access). While this procedural norm is fine for the CPI, it is
misleading for broadband policy.
That would not have to be a problem if the FCC kept its own price index for its own purposes. However, the
FCC has steadfastly refused to keep a
broadband price index for many years,
even while it tracks many other aspects
of broadband. How can the FCC make
informed competitive policy when it
has to rely on the BLS for a price index
that does not reflect the FCC’s policy
priorities? Our study directs attention
at this problem.
Indeed, the FCC has much to do. Its
index would have to account for qualitative improvements, as well as the
bundling of broadband pricing with
other information services, such as cable television and telephony. The FCC
also probably would want to measure
changes to the frontier more quickly
than BLS, watching prices of new access modes (smartphones), as well as
the gains from Skype and other VoIP
(using other phone services). It might
be challenging to figure out the gains
from Twitter over other text messaging, but that must be a component of
the mix too.
Shane Greenstein ( firstname.lastname@example.org.
edu) is the elinor and Wendell hobbs Professor in
the Kellogg School of Management at northwestern
University, evanston, iL.
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