Internet (Power) to the People: The Impact of Demand-side Subsidies in Colombia

Abstract

Finding strategies to bridge the digital divide has been a major goal of public policy over the last decades. Accordingly, multiple demand-side interventions have been implemented to decrease Internet adoption barriers. In this paper, we assess the impact on internet adoption from a pricing subsidy to low-income households implemented by the Colombian government during the period 2012-2014. This is not a straightforward exercise as not all consumers in a small geographic region are offered the same plans and, more prohibitively, data on the size of the targeted market are not available. We develop a method that allows us to estimate a structural demand model of household preferences for Internet services and to gauge the effects of the subsidy policy while overcoming these limitations. We find that households present heterogeneity with respect to price sensitivity and that their adoption decisions are driven by the type of ISP (i.e., national or local provider) and the quality label of the service (i.e., broadband or narrowband). We find that a price reduction of 18% results in a 15% increase in market coverage for low-income consumers. However, the evaluation of counterfactual policies demonstrates the existence of non-monetary barriers to adoption. Our findings suggest that pricing subsidies are effective in closing the digital divide, but that policies aimed at equalizing the quality of services are equally important and perhaps less costly. by Julian Hidalgo and Michelle Sovinsky