Demand elasticities for Internet services

Abstract

Noting the phenomenal growth of the Internet during the last few years, the spectacular nature of the information technology revolution represented by it, and lack of direct studies of demand for Internet services, this paper makes a beginning toward providing price- and income-elasticity estimates by using a simple model and cross-country OECD data for the year 2000. Seven main points are noted. First, the demand seems price-inelastic in all variants estimated by us. Second, the income elasticity appears to be unity or larger, indicating Internet services may not constitute a ‘necessity’. Third, the absolute price elasticity seems lower, particularly for the broader price measure, in the group of users than for subscribers. Fourth, the income elasticity also seems smaller for users than for subscribers. Fifth, the income-elasticity estimates suggest that measures to encourage Internet usage through subscriptions might not seem equity enhancing, but encouragement of usage through increased access to non-subscriber users should not carry such an implication. Sixth, the inelastic demand indicates scope for price leverage by providers. Seventh, the inelastic demand might have some revenue implications relative to the possibility of imposing or raising taxes on Internet usage.