IIA Guest Blog: Mark Dutz

By IIA

Our third, and final, guest post from the authors of the report “The Substantial Consumer Benefits of Broadband Connectivity for U.S. Households.”

Broadband as a household necessity: Data on households’ actual choices in the market are consistent with recent survey results

An April 2009 national survey by the Pew Research Center’s Social & Demographic Trends project asked what familiar household appliances Americans can’t live without. There were some striking re-evaluations, no doubt at least in part triggered by the belt-tightening effects of the recession. The proportion of Americans that considers a dishwasher or a cable or satellite TV as a necessity has dropped sharply since 2006, with dishwashers dropping 14 points with just 21 percent of Americans now rating it as a necessity, and cable or satellite TV dropping 10 points with just 23 percent rating it as a necessity. On the other hand, the public judgment about high-speed Internet actually increased, with 31 percent of Americans now considering it as a necessity, up from 29 percent in 2006.

This shift in consumer perceptions towards increasingly viewing broadband as a household necessity, based on what 1,003 Americans replied in telephone interviews, has now been confirmed and amplified by the Dutz-Orszag-Willig study, based on a much larger data set: the market choices of roughly 30,000 different heads of households, covering the type of Internet service (no home Internet, dial-up versus broadband connection) and the prices paid in the top 100 metropolitan regions across the U.S. over the period 2005 through 2008. Based on these data, the study finds that households are increasingly less willing to alter their broadband purchases in response to change in the broadband price.  This is what economists refer to as the “own-price elasticity of broadband”, and it actually progressively declines over time, 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!

The full Orszag-Willig-Dutz study, “The Substantial Consumer Benefits of Broadband Connectivity for U.S. Households” is available here (PDF). Your can also read posts by study authors Jonathan Orszag and Robert Willig.