Broadband: The Exception to the Rule that Technology Gets Cheaper the Longer It’s Around

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Call it the early adopter penalty: New technology is introduced at high prices, which drop rapidly as the goods spread from an exclusive to mass audience, become cheaper to produce, and eventually go completely mainstream. This price drop has reliably occurred to everything from portable DVD players to hi-def TVs, from iPods to iPhones and beyond. So why haven’t broadband prices decreased?

That’s the question asked by a couple of Kellogg School of Management researchers, who looked over 1,500 contracts of DSL and cable providers from the past five years, crunched the numbers, and found almost no price drop:

They found evidence of only a very small price drop, between 3 and 10 percent, nothing like the rates of price decrease that characterize the rest of the electronic world.

So why hasn’t there been a more significant price drop? Shane Greenstein, one of the researchers, says that, for the most part, cable and DSL providers have already gotten a major expense out of the way by installing the lines necessary to serve customers. After that:

“It becomes pure profit,” Greenstein says. A company might spend around $100 per year to “maintain and service” the connection, but people are paying nearly that amount every other month. Greenstein says that it is not surprising that prices were high during the buildout phase in the early and mid-2000s, since the firms were trying to recover their costs. “However, we are approaching the end of the first buildout, so competitive pressures should have led to price drops by now, if there are any. Like many observers, I expected to see prices drop by now, and I am surprised they have not.”

So, again, why haven’t prices dropped? Anyone? What happened to the “competitive pressures” consumers have come to expect?

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