Price and Quality Change in U.S. Broadband Service Markets

15 Pages Posted: 3 Apr 2017 Last revised: 16 Aug 2017

See all articles by Kenneth Flamm

Kenneth Flamm

University of Texas at Austin - Lyndon B. Johnson School of Public Affairs

Carlos Herrera

University of Texas at Austin, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2017

Abstract

Official government price indexes show both residential and business wired internet access prices essentially flat or increasing in the United States in recent years. In stark contrast, prices for wireless telecommunications services have been consistently falling, at rates in the 5-10% range since 2013, while mobile broadband data prices appear to have been falling at even greater rates. 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 construct a price index for U.S. residential broadband service, using a hedonic regression model estimated over pairs of adjacent time periods. The hedonic index controls for advertised maximum download and upload speeds, data caps, ISP brand, and state in which the service is offered. 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 in 2014 and 2015, with a rate of decline in quality-adjusted price close to zero in 2016.

In the second part of this paper, we construct direct measures of changes in wired broadband service quality over time, utilizing a relatively large sample of US households. The results demonstrate that internet download speed variation is primarily determined by local network traffic. We also find positive, statistically and economically significant rates of improvement in delivered broadband speed within advertised service quality tiers for U.S. internet service producers in recent years. Improvements in performance within speed tiers appear to be smaller, but comparable in magnitude to rates of improvement in quality-adjusted price indexes estimated in our econometric study of broadband service prices.

The estimated magnitudes of quality-adjusted price decline are generally larger than our direct estimates of (unadvertised) quality improvement within speed tiers in 2014 and 2015. We conclude that (a) declines in quality-adjusted U.S. broadband prices over 2013-2015 were more than double rates previously measured by researchers over the 2004-09 period; (b) there was essentially no decline in quality-adjusted price from 2015 to 2016; (c) the benefits of unadvertised within-tier delivered speed improvement are substantial in magnitude when compared to quality-adjusted price declines estimated using hedonic methods. Causes of the more rapid rates of decline in quality-adjusted price over 2013-15 merit further investigation.

Keywords: broadband, competition, market structure, hedonic price measurement, quality improvement

JEL Classification: C22, C43, D22, D43, L96

Suggested Citation

Flamm, Kenneth and Herrera, Carlos, Price and Quality Change in U.S. Broadband Service Markets (March 31, 2017). Available at SSRN: https://ssrn.com/abstract=2944384 or http://dx.doi.org/10.2139/ssrn.2944384

Kenneth Flamm (Contact Author)

University of Texas at Austin - Lyndon B. Johnson School of Public Affairs ( email )

2300 Red River St., Stop E2700
PO Box Y
Austin, TX 78713
United States
512-471-8952 (Phone)
512-471-1835 (Fax)

Carlos Herrera

University of Texas at Austin, Department of Economics ( email )

Austin, TX
United States

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