Wtp Demand Bband

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

Outline Statement of the Problem Theoretical Structure Data Results Conclusions

Problem(s) 1. Can willingness to pay (WTP) information be obtained from surveys and used to describe “demand” ? 2. How do estimates of elasticities for broadband services compare to published estimates? 3. Can the use of WTP be generalized and applied to other products and services?

Theory Consumer Choice Contingent Valuation Lognormal Demand Market Demand Revealed Preference

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.

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

Lognormal Demand Curves Let Then

poi be the tolerance price of the ith household p be the actual market price qi = 1 if poi ≥ p qi = 0 otherwise

Assuming that poi is distributed as a 2 µ and σ lognormal with parameters p p

Lognormal Demand We have: P(qi = 1| p ) = P(poi ≥ p ) = 1 − Λ ( p; µ p , σ 2p ) Let Q represent the expected proportion of buyers we have: Q(p ) = 1 − Λ ( p; µ p , σ 2p ) = Λ (1/ p; − µ p , σ 2p )

Lognormal Demand Cont.

Q(p)

Demand for Product X 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0

10

20

30

40

50

60

Price (WTP)

70

80

90

100

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.

WTP Range by Census Region 140

Range of WTP

120 100 80 60 40 20 0 Region 1

Region 2

Region 3

Region 4

Average WTP by Type of Access to the Internet 50 40 30 20 10 0 Any Internet

Dial-up Yes

Cable No

DSL

WTP by Census Region 300 250 200 150 100 50 0 Region 1

Region 2 DVD

Region 3

Digital Camera

Region 4

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

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 dlog Q(p ) π = Elasticity given by d log( p )

Results Demand Demand Demand Demand

for for for for

Cable modem Service DSL Service DVD Players Digital Cameras

Preliminary Findings: Demand for Cable Modem Service

Price (WTP)

0 10

90

80

70

60

50

40

30

20

10

40 35 30 25 20 15 10 5 0 0

Proportion

Figure 1: Cable Modem Demand

Cable Modem Elasticity Price

Elasticity

$20

-0.53

$30

-0.59

$40

-0.75

$50

-0.98

$60

-2.25

$70

-3.34

Broadband Engle Curves Engle Curve for Broadband Services (ADSL and cable modem)

Probability

100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 1

2

3

4

5

6

Income Groups ADSL

For households with Broadband Access

Cable Modem

7

8

9

Preliminary Findings DSL

Price (WTP)

100

70

65

60

55

50

45

40

35

30

25

20

15

10

5

35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 0

Market Penetration

The Demand for ADSL

DVD Players Figure 4: Demand for DVD 30.0%

Proportion

25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 100 150

200 250 300 350

400 450 500 550

Price (WTP)

600 600+

Digital Cameras

Price (WTP)

10 00 11 00 >1 10 0

90 0

80 0

70 0

60 0

50 0

40 0

30 0

20 0

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 10 0

Proportion

Demand for Digital Camera

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

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

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

Contact Paul Rappoport [email protected] or [email protected]

Lester Taylor [email protected]

Don Kridel [email protected]