Price elasticity of demand for broadband: Evidence from Latin America and the Caribbean

In this study the authors analyze fixed broadband retail prices in Latin America and the Caribbean (LAC), and provide estimates about the effect of price changes on broadband adoption. The analysis is based on a survey of plans and tariffs conducted by the authors during Q2 2010. Their results suggest that fixed broadband services in LAC are generally expensive and of poor quality when benchmarked against Organisation for Economic Co-operation and Development (OECD) countries, although there is significant variance between markets in the region. In order to isolate the effect of prices on broadband adoption they use an instrumental-variable approach. Their findings show that broadband demand is relatively elastic to price in LAC but not in the OECD. They estimate that an average price reduction of 10% would result in an increase of almost 22% in the penetration rate in LAC, equivalent to almost 8.5 million additional broadband connections. Several policy implications result from these findings. First, national broadband policies in LAC should pay a closer attention to a deficit of competition in fixed broadband services, as households and firms face high prices for poor quality services, thus deterring adoption. Second, while their findings generally suggest that price reductions could significantly increase penetration, they elasticity estimates reveal that price effects might not be sufficient to achieve the penetration goals set in national broadband plans. This validates the need for complementary policy strategies that affect other determinants of broadband demand. The example of Brazil is used to illustrate this finding.