Willingness to Pay and the Demand for Broadband Services

1
Willingness to Pay and the Demand for Broadband
Services

• Paul Rappoport, Temple University and
  Econsult
  
• Lestor D. Taylor, University of Arizona
• Donald J. Kridel, University of Missouri at St.
  Louis
  
• Presentation to 2002 ICFC Conference
• June 25-28, 2002
• San Francisco

2
Outline

• Statement of the Problem
• Theoretical Structure
• Data
• Results
• Conclusions

3
Problem(s)

• Can willingness to pay (WTP) information be
  obtained from surveys and used to describe
  demand ?
  
• How do estimates of elasticities for broadband
  services compare to published estimates?
  
• Can the use of WTP be generalized and applied to
  other products and services?

4
Theory

• Consumer Choice
• Contingent Valuation
• Lognormal Demand
• Market Demand
• Revealed Preference

5
Contingent Valuation Overview

• Method that requires asking people directly, in a
  survey, how much they would be willing to pay for
  a specific service.
  
• Contingent in the sense that people are asked
  their willingness to pay, contingent on specific
  hypothetical scenario.

6
CV and the Demand for Broadband Service

• Focus is on the price of the service thus
  economic value associated with a service is
  generally bounded
  
• Application is directed towards the estimation of
  price elasticities

7
Lognormal Demand Curves

• Let
• Then
• Assuming that is distributed as a
  lognormal with parameters

8
Lognormal Demand

• We have

9
Lognormal Demand Cont.
10
Data

• 2,011 responses to an omnibus survey administered
  during the first quarter, 2002.
  
• Questions included for broadband service (ADSL,
  Cable Modem), DVD players and Digital Cameras.
  

11
WTP Range by Census Region
12
Average WTP by Type of Access to the Internet
13
WTP by Census Region
14
Application to Broadband

• Question 1 What is the least price at which the
  respondent would consider the item too expensive
  
• Question 2 What is the highest price at which he
  would dismiss it as a shoddy article of inferior
  quality

15
Computation

• Compute the fraction of respondents quoting a
  threshold price that exceeds a price p.
  
• Plot Q(p) against p
• Estimate lognormal parameters from the data
• Elasticity given by

16
Results

• Demand for Cable modem Service
• Demand for DSL Service
• Demand for DVD Players
• Demand for Digital Cameras

17
Preliminary Findings Demand for Cable Modem
Service
18
Cable Modem Elasticity
19
Broadband Engle Curves
For households with Broadband Access
20
Preliminary Findings DSL
21
DVD Players
22
Digital Cameras
23
Elasticity

• Initial estimates are in line with previously
  published values
  
• Rappoport, Taylor, Kridel
• CM -0.81, -1.05
• DSL -1.17 -1.55
• WTP
• CM -0.75 -0.98
• DSL -1.17 -1.76
•     

24
Conclusions

• Theory of consumer choice works (easily
  implemented)
  
• Illustrates potential value using CV approach
• Derived elasticities in line with other published
  results
  

25
Issues and Further Research

• Further testing of wording of questions for CV
  required
  
• Test question design that focuses on specific
  attributes and a consumers WTP for attributes on
  the margin (hedonic price approach)
  
• Explore ways to incorporate demographics directly

26
Contact

• Paul Rappoport
• Prapp4_at_comcast.net or rappoport_at_econsult.com
• Lester Taylor
• myros_at_worldnet.att.net
• Don Kridel
• kridel_at_jinx.umsl.edu