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Usage‐Based Pricing and Demand for Residential Broadband

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  • Aviv Nevo
  • John L. Turner
  • Jonathan W. Williams

Abstract

We estimate demand for residential broadband using high‐frequency data from subscribers facing a three‐part tariff. The three‐part tariff makes data usage during the billing cycle a dynamic problem, thus generating variation in the (shadow) price of usage. We provide evidence that subscribers respond to this variation, and we use their dynamic decisions to estimate a flexible distribution of willingness to pay for different plan characteristics. Using the estimates, we simulate demand under alternative pricing and find that usage‐based pricing eliminates low‐value traffic. Furthermore, we show that the costs associated with investment in fiber‐optic networks are likely recoverable in some markets, but that there is a large gap between social and private incentives to invest.

Suggested Citation

  • Aviv Nevo & John L. Turner & Jonathan W. Williams, 2016. "Usage‐Based Pricing and Demand for Residential Broadband," Econometrica, Econometric Society, vol. 84, pages 411-443, March.
    • Handle: RePEc:wly:emetrp:v:84:y:2016:i::p:411-443
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    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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