Surprised that Gigabit and Competition Lead to Lower Prices for Legacy Products?

Would you be surprised--at all--if a study of internet access pricing finds that competition leads to lower costs? Would you be surprised if a study finds that new services and new competitors offering products sold at higher prices--but higher potential value--lead to lower prices?

Would you be surprised if new competitors, offering better value, for lower prices, take market share away from providers offering “inferior” products at higher prices than the new products?

Probably the only statement that might find even a bit of disagreement is that new products sold at higher prices lead to lower prices for legacy services.

“Broadband Competition Helps to Drive Lower Prices and Faster Download Speeds for U.S. Residential Consumers” is the title of a study by Dan Mahoney, associate, and Greg Rafert, VP of the Analysis Group. The study finds that when a new gigabit service is offered in a market, prices for slower speed offers decline.

The study of high speed internet access pricing by the Analysis Group was funded by the Fiber to Home Council.

“The presence of gigabit service in a Designated Market Area (“DMA”) is associated with a $27 per month decrease in the average monthly price of broadband plans with speeds greater than 100 Mbps and less than 1 Gbps,” the study says. “This is equal to a reduction of approximately 25 percent of the monthly standard price.”

In an area with two gigabit access providers, “we estimate that the standard monthly price for gigabit internet will decline by approximately $57 to $62, which is equal to a reduction in price of between 34 and 37 percent.”

When gigabit internet is available, prices of “slower” speed services also decline. The authors estimate that prices for plans of 25 Mbps, but less than a gigabit, drop about $13 to $18 a month, representing a cost decline of about 14 percent to 19 percent.

None of those developments should be surprising. Competition tends to lead to lower prices, which is why policymakers and lawmakers often prefer it, why studies of markets with new competition often confirm the dynamics and why it is possible to note that new competition--lead by gigabit offers--tends to reduce prices of existing access services.

Perhaps the basic point is simply that competition leads to lower prices across the board. Nor should be surprising that new offers lead to lower prices for legacy offers. As the launch of the latest model of a smartphone leads to lower prices for the model being replaced, so a new “lead” offer offering more value will tend to devalue legacy offers offering what now is “less value.”