Why has the price of computers decreased but the price of broadband internet connection increased (or HAS it?). If you need an analysis for a Microeconomics class this will be helpful.

...or a Macroeconomics class as well...

The author of this blog entry (found HERE and also pasted in full below the fold at the bottom of this entry) uses a graph to show how, in the last 5 years, the price of computers (BLACK arrow) has decreased over 40%  but the price of Broadband (RED arrow) has increased (slight, but an increase).

While the blog entry is very short it suggests (explicitly and implicitly) 2 Microeconomic and 1 Macroeconomic concept that are important for students to know.

(1) In Microeconomics, two goods are considered Complements if they are used together. They are separate and distinct goods, each with their own market price and cost of producing. They are largely dependent on each other to function profitably in the market place. 

When the PRICE of one of the complementary goods DECREASES (in this case computers), the DEMAND for the other good used with it INCREASES (Broadband Internet connection).  This makes sense.  People buy more computers so they need more internet access. This could be the reason, but...

(2) The computer market is vast and their are lots of competitors.  With more competition, prices tend to gravitate closer to the actual cost of production (this is a characteristic of a "perfectly competitive firm").  In broadband "production" this is less so:

"The high, fixed costs of broadband means that there hasn’t been a big rise in competition among providers, according to Scott Wallsten, Vice President for Research and Senior Fellow at Technology Policy Institute. Indeed, most Americans don’t have more than two options when it comes to wireline broadband providers...."

High fixed costs serve as a barrier to entry in markets. It takes very large upfront investments that may take years to re-cover.  Hence competition is more limited AND the producer is able to charge a price, dictated by the market demand for the good/service, that is something greater than the cost of producing.  In other words, the producer has pricing power ABOVE the Marginal Cost of producing extra units of the good/service.  This could be the answer, but...

The Macroeconomic concept comes from one the commenter's on the blog entry in regards as to how the Consumer Price Index is calculated and its accommodation for changes in the quality of a good or service over time. 

Is the price consumers paid for broadband in 2007 the SAME broadband they pay for in 2012?

If the price of broadband (consider it just a single good/service) has increased 10% since 2007  BUT the amount of speed, quality of the connection, and places I can access it has increased, say 50% or more, am I not better off per dollar spent?

Has the BLS fully accounted for this quality change and it is built into the price change noted in the chart, so in real terms broadband has increased 10%?  This could be the reason, but...

This is why I love Economics! All three answers COULD be correct!

What do you think?  Which one seems the likely culprit or am I missing a piece of the puzzle? 

Why your computer is getting cheaper but your broadband bill isn’t

As a general rule, prices of technology-driven products and services tend to fall over time. But what’s happened with broadband prices is a clear exception.

 

At GigaOM, we closely track the world of broadband, and were curious what has happened to the prices of it relative to some other technology-dependent products and services. So using the most recent data from the Bureau of Labor Statistics, we compared the prices of wireline broadband to that of computers, computer software, and wireless cell phones. We also tracked those against the entire Consumer Price Index.

Here’s what we found: While the price of these other technology-driven products and services has continued to fall over the last few years—personal computer prices have dropped over 44 percent in five years—the prices for wireline broadband have mostly been flat.

So why haven’t wireline broadband prices budged in recent years? The high, fixed costs of broadband means that there hasn’t been a big rise in competition among providers, according to Scott Wallsten, Vice President for Research and Senior Fellow at Technology Policy Institute. Indeed, most Americans don’t have more than two options when it comes to wireline broadband providers. (See how many your area has here. )

In the meantime, people who don’t have broadband want it badly and the for those who do have it, it’s become increasingly indispensable. The result is that there hasn’t been much downward pressure on prices.

The last few months did see a very slight drop in the price of broadband. It’s unclear whether that’s just a temporary blip or beginning to use the high-speed wireless network LTE as a substitute for wireline broadband. (Of course, if it’s the latter and that trend continues, that could drive down the prices for broadband.) ”A big, and open, question is whether LTE will begin to compete on the margins with wireline broadband,” says Wallsten.