Evidence of a Modest Price Decline in US Broadband Services

The authors construct a price index for broadband services in the United States between 2004 and 2009, analyze over 1500 service contracts offered by DSL and cable providers in the United States, and employ a mix of matched-model methods and hedonic price index estimations to adjust for qualitative improvements.

In general, they find some evidence of a quality-adjusted price decline, but the evidence points towards a modest decline at most. The estimates of the price decline range from 3% to 10% in quality-adjusted terms for the five-year period, which is faster than BLS estimates for the last three years. These modest price declines look nothing like other parts of electronics, such as computers or integrated circuits, which raises many questions.

The findings raise an open question about the economic gains to households from switching between standalone and bundled contracting forms after adopting broadband. These gains do not play a role in standard price indices for Internet access. Properly estimating them requires information about the extent of the discount and the prevalence of the switching among experienced households. For BLS to properly estimate such switching it would have to sample household expenditure at greater frequency than every three or four years, as it presently collects. Notably, this example adds to a growing list of examples which underwent a rapid change in a short period of time - such as dial-up Internet access, pharmaceuticals coming off patent, personal computer - where frequent surveying would have measured gains more accurately.also inform a range of policy discussions concerning US broadband services.