Researcher Pins Broadband Price Stagnation On Supplier's Market

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Why haven't broadband prices decreased like those of most technologies?

That was the question a Northwestern University researcher decided to examine, and he found that broadband prices between 2004 and 2009 declined slightly in comparison with other parts of electronics, which tend to show relentless and rapid declines.

Professor Shane Greenstein found that a decision in 2003 to leave regulation up to the broadband companies themselves "has caused much of the stagnation in broadband service prices," according to an article in the September issue of Kellogg Insight, a publication of Northwestern's Kellogg School of Management.

Pointing out that only two wireline providers supply broadband to the vast majority of homes, Greenstein asked rhetorically: "So if you were in such a market as a supplier, why would you initiate a price war?"

Suppliers, he noted, keep prices level but compete by slowly increasing quality.

Greenstein said providers, which now pass more than 95% of U.S. homes, tend to keep their costs below prices once they have installed lines. "At that point, it becomes pure profit," he added. "However, we are approaching the end of the first buildout, so competitive pressures should have led to price drops by now, if there are any. Like many observers, I expected to see prices drop by now, and I am surprised they have not."

Greenstein said one measure of broadband quality -- price of cable modem speeds -- improved, but he added that he feared a new problem could creep into the system: slow system upgrades combined with the explosive growth of streaming video could result in new bottlenecks.

Greenstein said he was surprised that consumer price index data for broadband is poor, making it difficult for intelligent decisions to be made. Without clear data, he added, decisions are often made based on arguments and debates. "I find it shocking sometimes how often government makes decisions by the seat of their pants," he said.

The co-author of the study was Ryan McDevitt. The two researchers analyzed 1,500 DSL and cable service provider contracts between 2004 and 2009.

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