Quality Competition in the Broadband Service Provision Industry

We conduct an empirical analysis of quality competition between broadband Internet Service Providers (ISPs), using National Broadband Map data for 2011-2013 for almost a thousand local markets in California. We examine how incumbent ADSL firms respond to competition from CLECs and cable modem service providers. We use an important quality attribute, the downstream data rate, and estimate the strategic choice of quality for broadband ISPs.

Our paper follows a static game theoretic approach to the profit maximization decision of a broadband provider that leads to a simple two-stage method of estimation of the structural parameters of the ISPs’ profit functions. The method accounts for both the strategic aspect of each firm’s quality decision, as well as the endogeneity problems inherent in the estimation problem.

Our results include two main findings. First, ILECs improve the quality of their ADSL offerings when a cable player enters the market, and also when cable operators start to offer DOCSIS 3.0 speeds. Second, ILEC ADSL providers do not raise their service quality in response to ADSL competition from CLECs, but they do boost their speed when CLECs deploy fiber in the market. This research represents the first step in what we hope to be a major advance in the empirical analysis of broadband provision, where little structural econometric work has been done.