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Broadband Market Growth Narrows
Subject Price and income elasticity of demand
Topic Elasticity
Key Words Slowdown, growth, subscribers, prices, cost, discounts, revenue, consumers, suppliers
News Story

The number of broadband subscribers is increasing, but at a slower rate: 12.6 percent in the first quarter compared to the previous quarter, for 8 of the 17 major players in the market. The slowdown is most marked in digital subscriber line service (DSL). Verizon Communications attracted 13 percent more new customers, down from 23 percent, while BellSouth's growth rate fell from 34 percent to 17 percent. High-speed access via cable has held up better. AT&T Broadband subscribers grew 9.4 percent, up from 8.5 percent, while AOL Time Warner grew its customer base by 14.5 percent, down from 15.4 percent.

Part of the reason is higher prices. The average monthly cost of cable modem service rose 19 percent last year to $44.22, and monthly DSL prices rose 7 percent to $51.67. Discounts have also been cut back. Last year, Verizon offered DSL for the first three months at only $29.99 a month, plus a free camera. In March 2002, the discounted price was $39.99 a month with a free gift. In April, the $29.99 price resurfaced, but with no gift. Comcast no longer offers any discounts. Companies have realized that the deals were hurting revenue.

The economic slowdown is also influencing consumers' behavior. With less money to spend, many are foregoing broadband access. An industry survey found that 76 percent of dial-up users were not keen to pay more for broadband. Prices are unlikely to fall as a number of broadband suppliers have folded or curbed their expansion. Also, with little Internet content requiring faster speed connections, there is little reason for consumers to switch to broadband access.

(Updated June 15, 2002)

Questions
1.

Broadband companies have found that discounts in price actually reduced revenues.
a) What does this imply about the numerical magnitude of the price elasticity of demand for broadband access?
b) Is the demand elastic or inelastic?
c) Draw a diagram of the demand for broadband access, illustrating the degree of elasticity at the market price.
d) Why do you think that the demand curve is as elastic or inelastic as you indicate? Refer to the determinants of the price elasticity of demand in conjunction with the news story.

2. The demand for broadband access has been hurt by the economic slowdown. Suppose that, holding everything else constant, the lower incomes have led to less demand for broadband access.
a) In what numerical range does the income elasticity of demand for broadband access lie? Why?
b) What type of economic good or service is broadband access to the Internet?
3. Why would it have been helpful to the broadband companies to know the price and income elasticities of demand?
Source Andrew Backover, "Web surfers snub pricier broadband Internet access," USA Today, April 26, 2002.

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