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Friday, September 8 • 4:43pm - 5:15pm
Price and Quality Competition in U.S. Broadband Service Markets

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Official government price indexes show both residential and business wired internet access prices essentially flat or increasing in the United States since 2007. In stark contrast, prices for wireless telecommunications services have been falling at a consistent rate of about 2 to 4 percent per year over this period, while mobile broadband data prices appear to have been falling at rates a full order of magnitude greater. Can the sluggish pace of price decline in official data on wireline broadband service prices be explained by unmeasured quality improvement?

In the first part of this paper, we first construct direct measures of changes in wired broadband service quality over time, utilizing a relatively large sample of US households. The results show positive, statistically and economically significant rates of improvement in delivered broadband speed within given service quality tiers for most U.S. internet service producers in recent years, as well as a general shift within households toward higher service quality tiers. Improvements in performance within speed tiers appear to be comparable in magnitude to rates of improvement in quality-adjusted price indexes that have been estimated in econometric studies of broadband service prices. These statistical results are then used to construct within-tier service quality indexes, based on delivered vs. advertised data rates, for individual US broadband service providers.

In the second part of this paper, the effects of competition on within speed-tier quality improvement within US broadband markets are analyzed. We construct a dataset that allows us to model broadband quality improvement within core-based statistical areas (CBSAs). Our identification strategy for teasing out the short-run impact of increased competition on broadband quality allows for household-specific fixed effects, as well as controls for a variety of socio-economic characteristics of households within geographic areas, and hinges on the assumption that ISP-specific upgrades to capacity within a market (CBSA) potentially affect all households served by that that ISP. Our results show that in census tracts with large numbers of wireless mobile ISPs, quality improvement (measured by delivered speed) is greater than in census tracts that lack large numbers of wireless mobile competitors. Inter-modal broadband competition (wireless mobile vs. wireline and fixed wireless), at least in the short-run, appears to have statistically and economically significant impacts on delivered service quality.

In the final section of this paper, the ISP-level quality indexes previously constructed are combined with data on broadband service price, and measured characteristics of broadband service, from smaller, random samples of U.S. urban census tracts. A hedonic price index for U.S. residential broadband service is constructed, using a hedonic regression model estimated over pairs of adjacent time periods. This quality-adjusted price index spans the period from January 2014 to October 2016. Our hedonic price index shows quality-adjusted prices declining at annualized rates of approximately 3 to 4 percent. These magnitudes are only a little larger than our previous direct estimates of quality improvement We conclude that quality of delivered service, both within and across service tiers, is the primary dimension for competition amongst US broadband providers, and that the benefits of within-tier delivered speed improvement are substantial in magnitude when compared to quality-adjusted price declines estimated using hedonic methods.

Moderators
OU

Olga Ukhaneva

Navigant and Georgetown University

Presenter
KF

Kenneth Flamm

Univ of Texas at Austin

Author

Friday September 8, 2017 4:43pm - 5:15pm
ASLS Hazel Hall - Room 332

Attendees (18)