The Effects Of Competition On The Price For Cable Modem Internet Access

An important issue in economics is how market structure affects prices.While the standard view is that competition lowers prices, Chen andRiordan (2006) argued that with product differentiation it is notexceptional for prices to be higher under duopoly than monopoly. Thispaper empirically investigates one implication from Chen and Riordan,namely, that prices are lower under duopoly when consumer preferencesfor the two products are similar, and they are more likely to be higherunder duopoly if consumer preferences for the two products are morediverse. Focusing on the price for cable modem Internet access, with orwithout competition from a DSL provider, and using education dispersionand ethnic diversity as proxies for consumer preference diversity, wefind empirical support for this implication. In markets where preferencediversity is low, competition reduces prices. As preference becomes morediverse, the negative effect of competition on prices diminishes; andwhen preference diversity is high enough, competition increases prices.