Friday, November 21, 2008

Demand Elasticity for ICE Services

The Wall Street Journal today reported that many electricity utilities in the United States have experienced an unexpected decline in demand, particularly from residential users. It comes as no surprise to me that even essential public utility services have some demand elasticity, i.e., consumption declines when consumers feel financially strapped. When one worries about job stability, or in my case coming up with a Cornell tuition, electricity consumption becomes one of many costs subject to greater scrutiny and conservation.

Does heightened scrutiny extend to information, communications and entertainment expenses particularly as companies providing these services experiment with new ways to extract greater compensation from high volume users? I think so, particularly for consumers being weaned off “all you can eat” unmetered service which has served as the predominant pricing model for Internet access.

In economics a concept called the “fallacy of consumption” warns that if many consumers start to reduce consumption service providers and consumers can become worse off. Internet service providers, keen on extracting surcharges from power users, have to consider the consequences that heavy volume users decide to throttle down on their consumption rather than pay more.

Similarly, it may come to pass that even recession resistant industries such as cable television and mobile telephony, may have to confront the possibility that they cannot raise rates without a reduction in subscribership or shift in service tiers. That said, this week I received a bill from my wireline local exchange carrier that noted a minor rate increase. One would think that wireline telephone companies, facing the triple threat of competition from cable operators, churn to wireless options and the poor economy would not opt to raise rates. Perhaps this telephone company banks on plenty of users displaying inelastic demand for such a traditional service.

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