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.
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.
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