IIA Guest Blog: Jon Orszag

By IIA

Is There a Digital Divide?

This Friday, the FCC is hosting a workshop about the “digital divide” among American households with respect to broadband usage.

A recent research study that I conducted with two colleagues of mine, Mark Dutz and Robert Willig, reached a number of conclusions that should help to inform that workshop.

First, we found continued evidence of a significant digital divide.  For instance, while 82 percent of Asian households in 2008 were connected to home broadband, only 57 percent of African-American households were connected. While 83 percent of college graduate households were connected at home, only 38 percent of households with less than high school diplomas had adopted home broadband.  And while 84 percent of GenY households between ages 18 and 24 were connected, only 43 percent of senior households aged 65 and over had adopted it.

Second, some good news: among those who are connected to broadband at home, there is no significant valuation gap based on race, although there are valuation gaps along other lines. Among households that are connected to home broadband, blacks/African Americans, Asians and whites/Caucasians have similar valuations of broadband at home.  However, there are significant differences in how much broadband is valued according to age, level of education, and income.  For example, younger GenY and “GenX” heads of households (44 years of age and younger) value broadband much more than older householders (45 years of age and older).

Third, the more people experience broadband at home, the more they value it.  For example, households’ valuations of higher-speed broadband depend on their experience with broadband: those who are connected to broadband at home value higher speeds over 40 percent more than those who have only home dial-up connections. These data would suggest that the more Americans experience broadband, the higher will be demand for it.

Finally, we estimated that consumers receive more than $30 billion of net benefits from the use of fixed-line broadband at home, with broadband increasingly being perceived as a necessity.  For example, people appear unwilling to cut their broadband even when they lose their jobs, based on their need for connectivity as reflected in the significant jump upwards in the use of job boards and career information sites during the economic downturn.  From a technical perspective, we observe a progressive decline over time in the own-price elasticity of broadband, from -1.53 in 2005 to -0.69 in 2008.  In other words, in 2005 a 10 percent rise in the overall price of broadband would have led to a 15.3 percent decline in the quantity demanded, but by 2008, a 10 percent rise in the price of broadband would lead to only a 6.9 percent decrease in the quantity of broadband demanded. This result indicates that broadband is progressively being perceived by those who are using it as a household necessity. Such a finding is consistent with a recent survey of what Americans consider as a “necessity” or a “luxury.”  The survey found that 31 percent of Americans consider broadband Internet a “necessity”. This puts broadband Internet ahead of “dishwasher” or “cable or satellite TV” in the necessity rankings.

— Jon Orszag