Usage-Based Pricing of Residential Broadband: Cost Savings and Implications for Subscribers

Posted by Social Science Research Network

Usage-Based Pricing of Residential Broadband: Cost Savings and Implications for Subscribers – Jacob B. Malone, John L. Turner & Jonathan W. Williams (University of Georgia – C. Herman and Mary Virginia Terry College of Business – Department of Economics)

ABSTRACT: Despite the growing prevalence of usage-based pricing, its effects on subscribers are largely unknown, primarily due to limited data access. Using novel data that tracks broadband usage by over 75,000 subscribers at the monthly and fifteen- minute level, we first show that usage-based pricing is effective at reducing usage and limiting growth in the most extreme subscribers. Second, we show low-usage subscribers pay up to forty times more per gigabyte than high-usage subscribers to emphasize the degree of subsidization that is occurring. Next, we demonstrate that when provided with simple means to track their usage, subscribers are very adept at doing so. They rarely choose dominated plans and respond sensibly to the possibility of incurring overage charges. Subscribers tend to reduce usage in a uniform fashion across the day to avoid overage charges. This suggests peak usage, which determines an Internet Service Provider’s costs, is fairly elastic, yet a pro- portionate reduction in off-peak usage indicates an inefficiency. This suggests more progressive policies like congestion-based pricing are likely required to effectively manage peak usage and more equitably distribute costs among subscribers, so long as the implementation costs are not too large.