Let’s Make a Deal: Price Sensitivity and Willingness to Pay in the American Broadband Market

27 Pages Posted: 3 Apr 2012 Last revised: 22 Aug 2012

See all articles by Thomas Koutsky

Thomas Koutsky

USAID Global Development Lab

Chris McGovern

Connected Nation Inc.

Raquel Noriega

Connected Nation Inc.

Date Written: August 21, 2012

Abstract

Although nearly every American household has access to a broadband network, nearly one in three American homes still do not subscribe to the service. For many households the cost of home broadband service is the barrier that prevents them from subscribing. As the federal government joins with broadband service providers and non-profit groups to determine the best way to overcome this cost obstacle, key questions raised are how much are current non-adopters willing to pay for broadband service at home, and, as a result, how large should effective price discounts or subsidies be in order to overcome this barrier.

To that end, this study uses a rich data set collected by Connected Nation in 2011 through Random Digit Dial (RDD) telephone interviews with 15,082 adult heads of households who do not subscribe to home broadband service across a heterogeneous selection of states. This survey research aims to better understand demographic and socioeconomic characteristics of non-adopters and assess key barriers to broadband adoption.

This study finds that a majority of non-adopters would not be willing to subscribe to home broadband service at any price, indicating that there are other barriers to entry beyond affordability at play. Yet price remains a key barrier to broadband adoption among many. Connected Nation’s data estimates that 39% of non-adopters report that they would subscribe to home broadband service if it were offered at a price they consider acceptable. This study analyzes price sensitivity across non-adopters of various demographic groups and finds that there are significant variations between different socioeconomic groups.

Using a binary logistic regression, the study estimates the marginal impact of geographic and socioeconomic factors on non-adopters’ price sensitivity. Results show that the marginal impact of socioeconomic factors including race, ethnicity, age, rural/non-rural differences, the presence of children in the household, educational attainment, and employment status all have significant marginal impacts (positive or negative) on non-adopters’ willingness to subscribe to broadband at a price they consider acceptable. By contrast, the impact of having a disability does not have a marginal effect on the likelihood of a non-adopter being price sensitive.

In addition, this study employs a Van Westendorp Price Sensitivity analysis to measure how much non-adopters would be willing to pay to have broadband service at home. The goal of this research is to inform the policy debate regarding consumers’ range of acceptable prices to promote universal adoption of broadband technology. The study estimates an optimal target subsidy level or price discount of $25.30 per month to best promote home broadband adoption among price sensitive non-adopters. This same test is applied to various demographic groups of non-adopters to examine price effects across different demographic groups. Estimated optimal subsidies are relatively consistent across socioeconomic groups that are characterized by lower rates of broadband adoption, such as low-income households, minorities, people with disabilities, and the elderly. This result suggests that policies aimed to maximize broadband adoption among price sensitive households that remain disconnected should focus on a constant price subsidy or discount regardless of the socioeconomic group targeted.

By contrast, estimated optimal price subsidies across the jurisdictions studied are significant. In Alaska, for example, a state showcasing the highest adoption rates across all studied, optimal price subsidies or discounts are estimated at $40.19 per month. This result is partially driven by the fact that current retail prices for broadband services are significantly higher in Alaska than in other jurisdictions. This result suggests that a one-size-fits-all policy may not be optimal in some jurisdictions with divergent market or socioeconomic conditions at play.

  Study Authors:

Tom Koutsky is Connected Nation’s Chief Policy Counsel. Prior to this role he served as a senior attorney advisor at the Federal Communications Commission and was a member of the team that wrote the first U.S. National Broadband Plan. Mr. Koutsky also was a resident scholar for the Phoenix Center for Advanced Legal and Economic Public Policy Studies, and has served as Vice President for Law and Public Policy at Z-Tel Communications, Inc.; assistant general counsel for Covad Communications Company; senior attorney, Competition Division, Office of the General Counsel, Cable for the FCC; and associate attorney for Steptoe and Johnson. He earned his J.D. with Honors from The University of Chicago Law School in 1991 and B.A. with Highest University Honors from the University of Illinois in 1988.

Chris McGovern is Connected Nation’s Manager for Research Development. Prior to this role he served as Research Analyst for ConnectKentucky, Senior Research Analyst for Connected Nation, and Research Assistant in Murray State University’s Department of Economics and Finance. Mr. McGovern received his Bachelor of Arts degree in political science from the University of Illinois at Chicago, and his Master of Science in economics from Murray State University.

Raquel Noriega is Connected Nation’s Director of Public Policy. Prior to joining Connected Nation, Ms. Noriega was an economic consultant in Washington, DC, Madrid, Spain, and London, UK, and has provided consulting services to telecommunications and media firms in the USA, Europe and Latin America. Ms. Noriega received her Masters in Arts and Sciences for Economics from Northwestern University. She is a graduate of the University of Michigan in Ann Arbor with a degree in economics.

Contact Information:

Chris McGovern Manager of Research Development Connected Nation cmcgovern@connectednation.org 270.781.4320 www.connectednation.org

Suggested Citation

Koutsky, Thomas M. and McGovern, Chris and Noriega, Raquel, Let’s Make a Deal: Price Sensitivity and Willingness to Pay in the American Broadband Market (August 21, 2012). 2012 TRPC, Available at SSRN: https://ssrn.com/abstract=2033415 or http://dx.doi.org/10.2139/ssrn.2033415

Thomas M. Koutsky

USAID Global Development Lab ( email )

1300 Pennsylvania Avenue NW
Washington, DC 20577
United States

Chris McGovern (Contact Author)

Connected Nation Inc. ( email )

1020 College St
Bowling Green, KY 42101
United States

Raquel Noriega

Connected Nation Inc. ( email )

1020 College St
Bowling Green, KY 42101
United States

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