Public Subsidies and Price Discrimination in Differentiated Oligopoly: Evidence from the Lifeline Extension to High-Speed Internet
50 Pages Posted: 2 Dec 2019
Date Written: October 18, 2019
The effects of the Lifeline subsidy on high-speed Internet prices and welfare are examined. Counterfactuals from a differentiated-product model of competition between cable and telephone firms show the $9.25 monthly subsidy is attractive to low-income households. Both firms lower prices for their low-quality subsidized plans to attract these consumers and increase the prices for all other plans. The change in relative prices increases the number of low-income households consuming high-speed Internet by 2.13 percentage points but the decline in surplus for high-income households and the cost of the subsidy mitigate these welfare gains. Welfare declines further under third-degree price discrimination with high-income households paying higher prices. However, the number of low-income households consuming high-speed plans increases by 2.15 to 2.88 percentage points and there are no public subsidy expenditures. Results suggest that when regulating to meet social goals, policy makers should consider the firm’s price responses to the relative demands from subsidized and non-subsidized groups. Price discrimination may be the more socially desirable way to increase subscribership from marginal consumers and to alleviate financial hardship through income re-distribution.
Keywords: Internet, price discrimination, subsidies, uniform pricing
JEL Classification: H24, H25, L13, L96
Suggested Citation: Suggested Citation