The Benefits from Bundling Demand in K-12 Broadband Procurement

2024-02-11

Social Science Research Network

AI Summary

This study evaluates a market design reform in K–12 broadband procurement—shifting from decentralized bidding to regional demand bundling—to address supplier markup due to fixed infrastructure costs and the “exposure problem” faced by schools. Using an event study design, parallel trends tests, counterfactual expenditure boundary analysis, and welfare estimation, we provide the first empirical causal evidence that demand bundling mitigates this exposure problem under voluntary participation. Results show the reform reduced per-megabit-per-second monthly broadband prices by 37% (≈$10/Mbps/month), increased per-student bandwidth fivefold, and generated annual savings for schools at least equal to the total federal E-rate subsidy—yielding substantial net social welfare gains. Our core contribution is demonstrating that demand aggregation can systematically correct procurement market failures in public digital infrastructure, offering generalizable evidence for mechanism design in public-sector technology procurement.

Technology Category

• Game Theory and Economic Paradigms: Auctions and Market-Based Systems
• Multiagent Systems: Mechanism Design
• Machine Learning: Online Learning & Bandits

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Responsible Web: Measurement, analysis, and circumvention of Web censorship
• Security and Privacy: Large-scale security measurements

Abstract

We study a new market design for K-12 schools' internet procurement. In 2014, New Jersey switched from school-specific decentralized procurement to a new system that bundled participating schools into four regional groups. Using an event study approach, we estimate that participation in this new procurement system reduced K-12 schools' internet prices by approximately $10 per megabit per second per month (Mbps) 37% relative to baseline levels, while increasing bandwidth by 500% Mbps. Relying on a feature of the procurement design, we present evidence that prices fell because bundling mitigated the exposure problem in internet procurement -- the risk that suppliers win contracts insufficient to cover their fixed infrastructure costs. Our findings are robust to deviations from the parallel trend assumption that may arise in our setting because of voluntary participation. Bounding the change in school expenditures due to the program, we find that participants saved at least as much as their federal E-rate subsidy. Using the estimated price reduction and bandwidth expansion, we calculate substantial welfare gains under minimal assumptions on schools' demand for broadband.

Problem

• Designing bundled procurement to reduce K-12 broadband costs
• Mitigating exposure risk for providers in school broadband contracts
• Estimating cost savings and welfare gains from market redesign

Innovation

• Bundled schools into groups for procurement
• Mitigated exposure risk for providers
• Used event study and bounds approach