The Effects of Legacy Pricing Regulation on Adoption of Broadband Service in the United States
Debra J. Aron
Navigant Economics; Northwestern University
Allan T. Ingraham
Economists Incorporated; affiliation not provided to SSRN
April 1, 2012
We examine and document the effect of policy-relevant factors on broadband adoption. We focus on the role of the price of basic local service on broadband adoption, to determine whether and to what extent legacy telephone policies and associated pricing distortions interfere with the contemporary goal of increased broadband adoption. Legacy universal service policy suppressed basic local telephone rates for residential customers in some areas to below-cost levels, subsidized by a variety of other revenue sources, including switched access revenues, prices for non-basic features, and business rates. The economic theory supporting this policy was that lower prices for basic local service would encourage adoption of basic local service, encouraging universal connection to the public switched telephone network. Today, however, there is effectively universal subscription to some form of local telephone service, which may include wireless or wireline services that are provided at unregulated prices; and policy goals are transitioning away from promoting basic local service to promotion of universal broadband adoption.
We hypothesize that subsidized prices for basic residential services depress broadband adoption decisions. There are two reasons that we anticipate such an effect. First, broadband service and stand-alone traditional voice service are economic substitutes insofar as consumers can use broadband for voice service by purchasing an over-the-top VoIP service. Second, some customers may purchase a stand-alone voice line only or primarily for dial-up Internet access, for which broadband service is a substitute. Hence, for both reasons, we would expect to find a positive relationship between the price of basic local service and broadband adoption, meaning that where basic local service prices are lower, broadband adoption is lower. Intuitively, the logic is that, for a given price of broadband, the higher is the price of stand-alone voice service, the lower is the price hurdle to adopting broadband instead.
We test this theory using quarterly household-level data from the first quarter 2006 through the second-quarter 2010 for over 70,000 household observations. The data are from the nationwide TNS surveys and bill samples. Using a multinomial logit specification, we find that higher prices for basic local service are in fact associated with higher rates of broadband adoption, controlling for availability of broadband service, broadband expenditures, household income, age of the head of household, size of household, population density of the household’s location, race, and other factors. We find that the demographic variables have largely the expected effects consistent with the literature. We also find that once other demographic and price variables are controlled for, there is not a “rural” divide - that is, a household’s propensity to adopt broadband service is higher, all else equal, in less densely populated areas, controlling for income, broadband availability, and other factors.
Our results regarding the pricing variables are consistent with the hypothesis that promoting legacy policy goals of universal voice service by holding retail prices of basic local service artificially low impedes the achievement of current policy goals of universal broadband adoption. We believe our results are important because, unlike the numerous demographic variables that are known to be correlated with broadband adoption, the price of basic local service is, in many areas, subject to regulatory control and is therefore a policy variable. Our results suggest that relieving restrictions on prices of basic local service would promote the federal policy of universal broadband adoption.
Number of Pages in PDF File: 31
Keywords: Broadband, adoption, pricing, regulation, universal service
JEL Classification: L51, D12, L96
Date posted: April 2, 2012 ; Last revised: August 9, 2012