Broadband Price Diversity: Good for Adoption?
Why do Internet service providers (ISPs) merchandise numerous broadband plans and target different consumer groups? Can there be too many or too few options? Broadband offerings might eventually become too complex, varying in down- and up-load speeds, contract duration, price structure, technology, and the bundling of services.
Although ISP differentiation strategies for fixed or mobile broadband services are broadly accepted as legitimate business strategies, price discrimination generates lively debate in some countries with public interest groups and companies like Netflix demanding more uniform pricing. Critics claim that market segmentation leads to consumer confusion and unjustifiably-high prices in the presence of too much variety caused by multiple tariffs. Price discrimination in the telecommunications sector, especially usage-based pricing (UBP), can be seen as a serious threat to consumer welfare and policy actions aimed at reducing or prohibiting differentiated-pricing schemes. For example, the merger between the fixed broadband providers Charter Communications, Time Warner Cable, and Bright House Networks in 2016 was subject to an agreement prohibiting UBP for seven years and a commitment to refrain from using differentiated-pricing practices.
Academics and regulators often argue in favor of price diversity and stress its positive effect on broadband adoption because tariff diversity gives consumers more choices to better meet their bandwidth needs by distinguishing between low- and high-volume users. Especially for inexperienced broadband users who find it difficult to predict the online activities they will engage in and how much they will value those activities, low cost-low usage option tiers can incentivize broadband subscriptions. This kind of “downsizing” is, for instance, also prevalent in the US. When the cable companies, Verizon, Dish and Cablevision started offering cheaper, slimmed-down bundles of dozens of TV channels instead of hundreds, they immediately saw a substantial shift in their installed subscribers and, at the same time, gained new subscribers who had not used the service before.
Is price diversity a bad thing for consumers or does it foster broadband take-up, especially by laggards? Academic research finds that tariff diversity is a driving factor for broadband adoption and does not impede take-up. Based on a rich original dataset with more than 10,000 residential retail broadband offers for 23 European states between 2003 and 2011, my research found that broadband demand is positively related to increased tariff diversity, especially in the presence of inter-platform competition. This result confirms my previous research, conducted with my PhD supervisors using data from 82 countries in 2012. These results suggest that demands by some public interest groups to limit price discrimination in broadband markets should be viewed with caution. Such limits may come at the cost of reduced numbers of subscribers and work against the goals of national broadband strategies that aim to promote broadband adoption and the take-up of next generation Access networks.
References
Lange, M. R. J. (2017), Tariff diversity and broadband adoption in the European Union, Journal of Regulatory Economics, 52(3), pp. 285–312.
Haucap, J., Heimeshoff, U., Lange, M. R. J. (2016), The impact of tariff diversity on broadband penetration: An empirical analysis, Telecommunications Policy, 40(8), pp. 743–754.
The Charles Benton Junior Scholar Award recognizes significant achievement by a junior scholar in the areas of digital inclusion and/or broadband adoption, as evidenced by an empirically-based research paper, a policy proposal with justification, or an original essay. The inaugural recipient of the Award is Mirjam R.J. Lange, a PostDoc at University of Frankfurt, Germany. She holds a PhD from Düsseldorf Institute for Competition Economics (DICE) an Institute of Heinrich-Heine-University Düsseldorf, Germany. She studied Economics the University of Bonn, Germany, before she obtained her Masters’s degree from the University of Düsseldorf. Her main research focuses on price-discrimination in broadband markets and generally on policy issues in telecommunication. Moreover, she works experimentally on behavioral economics, such as salience theory. Mirjam Lange has published in Journal of the European Economic Association, Telecommunications Policy, and Journal of Regulatory Economics.