Public Subsidies and Price Discrimination in Differentiated Oligopoly : Evidence from the Lifeline Extension to High-Speed Internet

The impacts of the Lifeline subsidy on high-speed Internet access, prices and welfare are evaluated. Counterfactuals from a differentiated-product model of competition between cable and telephone firms show the $9.25 subsidy is a positive incentive but the share of low-income households in the United States consuming high-speed Internet increases by only 0.4 percentage points. Regulated price discrimination is more effective. When firms charge different prices for low- and high-income households choosing the same plan, the share of low-income households consuming high-speed Internet increases by about 1.71 to 4.109 percentage points. Overall societal welfare increases substantially with socially-optimal prices