Why When A Region Has Gigabit Internet and Provider Competition, Prices Drop Even For Slower Speeds

The data suggest that the mere presence of superior gigabit service drives down the price of inferior offerings.

The presence of competition, meaning two or more service providers, also reduces prices as they battle for customers.

The challenge is that gigabit service is expensive - and only 22% of US areas had two or more competitors. JL

Jon Brodkin reports in ars technica:

The presence of gigabit service is associated with a $27 decrease in the average monthly price of broadband plans. The data suggests even customers who don't purchase gigabit Internet benefit from its availability. (With) two providers of gigabit Internet (in a market), the price for gigabit Internet will decline between 34 and 37 percent
The mere presence of gigabit Internet speeds in a metro area drives down the price of plans with slower speeds, according to new industry-funded research. Thus, the data suggests that even customers who don't purchase gigabit Internet benefit from its availability.
This research also found—to no one’s surprise—that having more ISPs in a particular region drives prices down and that the presence of fast speeds encourages other ISPs to offer higher-speed plans to match their competitors.
The study, titled “Broadband competition helps to drive lower prices and faster download speeds for US residential consumers,” analyzed DSL, cable, and fiber broadband plans from the 100 largest DMAs (designated market areas) in the US. It was written by Analysis Group, an economics consulting firm, with research funding from the Fiber to the Home Council, an industry consortium founded by fiber network equipment manufacturers.
Here is a summary of the key findings:

• The presence of gigabit service in a market is associated with a $27 decrease in the average monthly price of broadband plans with speeds of 100Mbps or greater but less than 1Gbps. That’s a 25 percent price reduction.
• Markets with gigabit Internet also see smaller price decreases for plans as slow as 25Mbps. The presence of gigabit Internet has no significant effect on prices of plans with speeds below 25Mbps. This isn’t that surprising since the slowest plans are already the cheapest and aren’t suitable substitutes for gigabit speeds.
• Gigabit prices decline when at least two providers offer gigabit service. “If a DMA moves from having one to two providers of gigabit Internet, 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,” the study said. Going from one to three gigabit competitors would reduce prices by an estimated $98.11 to $106.50 per month.
• Competition at any speed reduces prices. “An increase of one competitor is associated with approximately a $1.50 decline in the monthly standard broadband price for Internet plans with speeds ranging from 50Mbps to less than 1Gbps,” the study said. For plans with download speeds of less than 25Mbps, the decrease in average monthly price is $0.42 for each competitor.
• Availability of fast speeds increases the likelihood that other ISPs will introduce their own higher-speed plans to match competitors. “In particular, we find that each additional competitor offering broadband in a higher speed category will increase the probability that other broadband providers in the market will offer broadband at those higher speeds by 4 to 17 percent on an annual basis,” the study said.
• Average monthly prices for each speed category are as follows: $52.60 for speeds less than 25Mbps; $74.05 for plans from 25Mbps to 99Mbps; $108.52 for plans of least 100Mbps but less than 1Gbps; and $165.63 for speeds of at least 1Gbps.

One limitation in this study relates to the size of the markets analyzed. The average market studied has a population of 1.45 million people and 7.38 Internet providers. Obviously, there isn't much overlap among wired ISPs, as cable companies in particular avoid each other's territory. There might be seven providers across a sizable area, but any individual neighborhood is unlikely to have much, if any, broadband choice.
Separate research from the Federal Communications Commission found that most Americans have no choice when it comes to high-speed Internet providers at home. As of June 30, 2015, only 22 percent of developed census blocks had at least two ISPs offering plans at the FCC’s broadband threshold of 25Mbps downstream and 3Mbps upstream. There were zero such providers in 30 percent of census blocks and one provider in 48 percent of blocks. About 55 percent of census blocks had no 100Mbps/10Mbps providers, and only about 10 percent had multiple ISPs offering those speeds.
There's no easy fix to the lack of competition. Google Fiber brought $70-per-month gigabit speeds to eight metro areas, but it recently halted expansion into new cities while it shifts to a less costly wireless network technology. AT&T and Comcast have been rolling out gigabit speeds in numerous cities, but those companies have also filed lawsuits in attempts to stall competitors. Municipal broadband networks can offer higher speeds and lower prices when private ISPs neglect to upgrade networks in non-competitive areas, but lawmakers in about 20 states have helped their friends at incumbent ISPs by imposing restrictions on those municipal broadband providers.
While the FCC's attempt to preempt state restrictions on municipal broadband was overturned in court, the commission under Chairman Tom Wheeler provided funding to improve rural broadband availability and used merger conditions to require expanded broadband deployments by AT&T and Charter. But with FCC control about to shift from Democrats to Republicans under President-elect Donald Trump, the commission will likely take a less active role in regulating ISPs and requiring broadband expansions.