The Effects of Competition on the Price for Cable Modem Internet Access

Abstract

An important issue in economics is how market structure affects prices. While the standard view is that competition lowers prices, Chen and Riordan (2006) argued that with product differentiation it is not exceptional for prices to be higher under duopoly than monopoly. This paper empirically investigates one implication from Chen and Riordan, namely, that prices are lower under duopoly when consumer preferences for the two products are similar, and they are more likely to be higher under duopoly if consumer preferences for the two products are more diverse. Focusing on the price for cable modem Internet access, with or without competition from a DSL provider, and using education dispersion and ethnic diversity as proxies for consumer preference diversity, we find empirical support for this implication. In markets where preference diversity is low, competition reduces prices. As preference becomes more diverse, the negative effect of competition on prices diminishes; and when preference diversity is high enough, competition increases prices.