THIS PAPER DEALS with how to value the introduction of new services in telecommunications. Much public discussion has centered on the evolving "information superhighway" as well as on the many new services that may be offered as high-capacity fiber optic transmission networks are extended into the telecommunications infrastructure. The Federal Communications Commission (FCC) has decided to tax longdistance users to subsidize Internet access to schools and libraries. The cost is estimated to exceed $2 billion a year. Numerous cable companies, such as Time Warner, have announced plans to upgrade their current coaxial-based networks to combined fiber-coax networks. This increased transmission capacity will allow many more channels of entertainment, high-speed access to information, and new interactive services. How can society establish the value of these new services and increased choices? This question has potentially important economic consequences and equally important public policy implications. Because of the network structure of telecommunications, public policy has always played a large role in its production and regulation. In countries such as the United States and Canada, very strict regulation (which is only slowly being loosened) has limited the ability of companies to compete freely in telecommunications. By demonstrating how to value new telecommunications services, I allow for a more reasoned approach to the necessary benefit-cost calculations; this approach can help both I thank Hyde Hsu, Renu Sharma, and Tomomi Kumagai for research assistance. 1 1. Hicks (1940). I recently used this methodology to value new varieties of consumer goods; see Hausman (1996a).
This paper uses data from a nationwide survey administered during late 2009 and early 2010 to estimate a random utility model of household preferences for broadband Internet service. Reliability and speed are important service characteristics: the representative household is willing to pay $20 per month for more reliable service; $45 for an improvement in speed from slow to fast; and $48 for an improvement in speed from slow to very fast. A representative household would be willing to pay $79 per month for a fast, reliable Internet service. Internet valuations increase with experience, and there has been an estimated two- to three-fold increase in consumer surplus per household between 2003 and 2010. If experience causes increased valuation, targeted programs that educate households about the benefits from broadband, expose households to the broadband experience and/or directly support the initial take-up of broadband have potential to increase overall penetration in the United States.
How much are consumers willing to pay for broadband service?
Spectrum auctions are used by governments to assign and price licenses for wireless communications. Effective auction design recognizes the importance of competition, not only in the auction but also in the downstream market for wireless communications. This paper examines several instruments that regulators can use to enhance competition and thereby improve market outcomes.
This paper examines how regulators behave in markets when there is a tension between retail competition and cross subsidy. Using retail and wholesale prices from regional Bell operating company territories and price-cost margins as a proxy for political influence, we find that private interests influence the structure of retail prices, especially favoring rural residential customers. Political influence also extends to wholesale access prices, although the magnitude of its effect is small. Federal high-cost universal service payments to a state do not reduce prices in that state's rural areas but instead lower urban business prices. (c) 2008 by The University of Chicago. All rights reserved..
This policy study uses U.S. Census microdata to evaluate how subsidies for universal telephone service vary in their impact across low-income racial groups, gender, age, and home ownership. Our demand specification includes both the subsidized monthly price (Lifeline program) and the subsidized initial connection price (Linkup program) for local telephone service. Our quasimaximum likelihood estimation controls for location differences and instruments for price endogeneity. The microdata allow us to estimate the effects of demographics on both elasticities of telephone penetration and the level of telephone penetration. Based on our preferred estimates, the subsidy programs increased aggregate penetration by 6.1% for low-income households. Our results suggest that Linkup is more cost-effective than Lifeline and that auto-enroll policies are important, which calls into question a recent FCC (2012) decision to reduce Linkup subsidies in favor of Lifeline. Our study can inform the evaluation of similar universal service policies for Internet access.
High-speed or "broadband" Internet access currently is provided, at the local level, chiefly by cable television and telephone companies, often in competition with each other. Wireless and satellite providers have a small but growing share of this business. An influential coalition of economic interests and academics have proposed that local broadband Internet access providers be prohibited from restricting access to their systems by upstream suppliers of Internet services. A recent term for this proposal is "net neutrality." We examine the potential costs and benefits of such a policy from an economic welfare perspective. Using a property rights approach, we ask whether transactions costs in the market for access rights are likely to be significant, and if so, whether owners of physical local broadband platforms are likely to be more or less efficient holders of access rights than Internet content providers. We conclude that transactions costs are likely to be lower if access rights are assigned initially to platform owners rather than content providers. In addition, platform hardware owners are likely to be more efficient holders of these rights because they can internalize demand-side interactions among content products. Further, failure to permit platform owners to control access threatens to result in inadequate incentives to invest in, to maintain, and to upgrade local broadband platforms. Inefficiently denying platform owners the ability to own access rights implies a need for price regulation; otherwise, there will be incentives to use pricing to circumvent the constraint on rights ownership. Price regulation is itself known to induce welfare losses through adaptive behavior of the constrained firm. The impact on welfare might produce a worse result than the initial problem, assuming one existed. Much of the academic interest in net neutrality arises from the belief that the open architecture of the Internet under current standards has been responsible for its remarkable success, and a wish to preserve this openness. We point out that the openness of the Internet was an unintended consequence of its military origins, and that other, less open, architectures might have been even more successful. A policy of denying platform owners the ability to own access rights could freeze the architecture of the Internet, preventing it from adapting to future technological and economic developments. Finally, we examine the net neutrality issue from the perspective of the "essential facility doctrine," a tool of the common law of antitrust. The doctrine establishes conditions under which federal courts will mandate access by competitors to the monopoly platform of a vertically-integrated firm. Because local broadband Internet access is not today a bottleneck monopoly (there are several competitors and the market is at an early stage of development), the essential facilities doctrine would not permit reassignment of access rights from platform owners to competitors. We conclude that "net neutrality" is a welfare-reducing...
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