Horizontal Mergers - Impact on Competitive Pricing and Quality Provisioning

Abstract

This paper studies how horizontal mergers between cable providers impact the vertical contracting outcomes (per-subscriber fees that TV cable providers pay the upstream content creators) and consequently the prices and composition of bundles that cable providers offer to end consumers. The central innovation of this paper is a structural bilateral bargaining model between content providers and content creators. My model framework allows me to conduct counterfactual analysis to assess the equilibrium impact of horizontal mergers between cable providers on renegotiated vertical contracts between the merging entities and content creators, as well as the new equilibrium vertical contracting terms between other non-merging competing cable providers and their upstream content creators. The new bilateral bargaining outcomes correspondingly impact the prices and cable bundle compositions these cable providers offer to their end consumers in a given media market. So as to showcase the relevance of my research to policy makers, I use the modeling framework to evaluate the equilibrium implications of the attempted purchase of Time Warner Cable by Comcast in 2014. My results suggest that the proposed merger would have resulted in lowering end-consumer prices (which increases consumer welfare) but at the same time would have also lowered quality provisioning by cable providers (which decreases consumer welfare). In my empirical context, households are more sensitive to changes in prices than changes in quality. Thus, the decrease in prices offsets the degradation in quality provisioning, leading to a net increase in consumer welfare. Lastly, I find that overlooking quality provisioning while evaluating merger application can potentially lead to an erroneous understanding of changes to consumer welfare.