The Effects of Competition on the Price for Cable Modem Internet Access

30 Pages Posted: 13 Oct 2007 Last revised: 1 Sep 2014

See all articles by Yongmin Chen

Yongmin Chen

University of Colorado at Boulder - Department of Economics

Scott Savage

University of Colorado at Boulder - Department of Economics

Date Written: September 2007

Abstract

An important issue in economics is how market structure affects prices. While the standard view is that competition lowers prices, Chen and Riordan (2006) argued that with product differentiation it is not exceptional for prices to be higher under duopoly than monopoly. This paper empirically investigates one implication from Chen and Riordan, namely, that prices are lower under duopoly when consumer preferences for the two products are similar, and they are more likely to be higher under duopoly if consumer preferences for the two products are more diverse. Focusing on the price for cable modem Internet access, with or without competition from a DSL provider, and using education dispersion and ethnic diversity as proxies for consumer preference diversity, we find empirical support for this implication. In markets where preference diversity is low, competition reduces prices. As preference becomes more diverse, the negative effect of competition on prices diminishes; and when preference diversity is high enough, competition increases prices.

Keywords: competition, Internet, preference diversity, prices

JEL Classification: L1, L13, L96

Suggested Citation

Chen, Yongmin and Savage, Scott, The Effects of Competition on the Price for Cable Modem Internet Access (September 2007). NET Institute Working Paper No. 07-13. Available at SSRN: https://ssrn.com/abstract=1021333 or http://dx.doi.org/10.2139/ssrn.1021333

Yongmin Chen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
303-492-8736 (Phone)
303-492-8960 (Fax)

Scott Savage

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States
303-735-1165 (Phone)
303-492-1112 (Fax)

HOME PAGE: http://holiday.colorado.edu/savages/

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