South-Western College Publishing - Economics  
Broadband Just Keeps Getting Cheaper And Cheaper
Subject Communications company SBC announced a reduction in the price of high-speed internet access.
Topic Monopolistic Competition; Product Markets; Profit Maximization and The Firm; Elasticity
Key Words

SBC communications, broadband, internet access, price competition

News Story

SBC Communications has announced a move to lower the price of broadband Internet access for only $14.95 a month, sharply undercutting competitors, and putting it below the cost of some dialup plans. The move is putting significant pressure on competitors to follow suit and lower prices.

Other companies aren't going down in price without a fight, though. Cox Communications, a large cable operator, argued that offering broadband wasn't all about price, and that its customers don't respond entirely to price motivations. It justifies its higher price for cable Internet access because of the higher speed and greater efficiency of the connection than through a phone service.

SBC is appealing to the nation's 77 million dialup Internet plan users, offering them cheaper rates than they may be paying for dialup. AOL, one of the largest dialup providers, currently costs approximately $23.90 per month. It is also taking advantage of the leaps in technology that allows Internet service to be provided more cheaply. Further, SBC, a phone service provider, is attempting to head off advance competition from cable companies and other providers of broadband Internet service.

Questions
1.

What is SBC assuming about the elasticity of demand of its customers by lowering price this way? Why?

2. What is the relationship between SBC's total revenue from this move and its expected elasticity of demand?
3. Using a graph of marginal revenue and marginal cost in a monopolistically competitive market for Internet service, indicate the impact that SBC's move will have on its profit potential.
Source Dionne Searcey. "A New Low Price for Broadband." The Wall Street Journal, 1 June 2005. D1+.

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