Gregory S. Crawford

The impact of the 1992 Cable Act on household demand and welfare

I measure the benefit to households of the 1992 Cable Act in light of strategic responses by cable systems to the regulations mandated by the act. A discrete-choice differentiated-product model of household demand for all offered cable television services forms the basis of the analysis. Aggregation over households and service combinations to the level of the data permits estimation on a cross-section of cable markets from before and after the act. The results indicate that while the regulations mandated price reductions of 10-17% for cable services, observed system responses yielded no change in household welfare. Post-act changes in cable prices are responsible for most of the difference.

Monopoly Quality Degradation and Regulation in Cable Television

Using an empirical framework based on the Mussa‐Rosen model of monopoly quality choice, we calculate the degree of quality degradation in cable television markets and the impact of regulation on those choices. We find lower bounds of quality degradation ranging from 11 to 45 percent of offered service qualities. Furthermore, cable operators in markets with local regulatory oversight offer significantly higher quality, less degradation, and greater quality per dollar, despite higher prices.

Bundling, product choice, and efficiency: Should cable television networks be offered à la carte?

We conduct a numerical analysis of bundling’s impact on a monopolist’s pricing and product choices and assess the implications for consumer welfare in cable television markets. Existing theory is ambiguous: for a given set of products, bundling likely transfers surplus from consumers to firms but also encourages products to be offered that might not be under a la carte pricing. Simulation of “Full A La Carte” for an economic environment calibrated to an average cable television system suggests that consumers would likely benefit from a la carte sales. If all networks continued to be offered, the average household’s surplus is predicted to increase by

New Products, New Programs, and Prices: Measuring Consumer Benefits to Changes in Cable Television Choices, 1989-1995

6.80 (65.6%) under a la carte sales (despite a total bundle price that almost doubles) and reduced network profits would have to be such that 41 of 50 offered cable networks have to exit the market to make her indifferent. Simulation of a “Theme Tier” scenario provides intermediate benefits. The incremental marginal costs to cable systems of a la carte sales and its impact in the advertising market and on competition are important factors in determining consumer benefits.

The Impact of the 1992 Cable Act on Consumer Demand and Welfare: A Discrete-Choice, Differentiated Products Approach

This paper evaluates the economic consequences of quality change and new service introductions in the cable television industry over the period 1989-1995. To address these issues, we develop and estimate a discrete-choice, differentiated product model of the demand for and the pricing of the complete set of cable services offered by systems in the industry. Our goal is to measure the benefits of changes in the choice set facing consumers over time. Our principal application is the construction of a quality-adjusted price index for cable television service for the period 1989 - 1995. In addition to measuring the total change in prices over this period, we decompose changes in this index to changes in the set of services offered, in the programming offered on those services, in the prices of those services, and in demographic and market characteristics. We then compare this index to that obtained by the Bureau of Labor Statistics as part of the Consumer Price Index. Failing to account for the benefits of increased quality and variety in cable television services yields an index which largely duplicates the 14.6% price increase reported by the Cable CPI between January, 1989 and July, 1995. However, incorporating consumer benefits from the addition of new services, the addition of programming to all services, and increased quality of existing programming yields an aggregate index which suggests a slight decrease of 2.2% in cable prices.

The economics of television and online video markets

The regulations implemented in accord with the 1992 Cable Act legislated that the per-channel cable prices fall by 10-17% from their September, 1992 levels. Upon implementation, however, while cable prices did show moderate declines, cable expenditures did not - in 1/3 of cable markets, the average consumers cable bill actually increased. In addition, the services provided by some systems and the programming provided on those services also changed. This paper measures the benefit to consumers of the Cable Act in light of these changes in services, programming, and prices by cable systems. A Discrete-Choice Differentiated Product model of demand for cable television service forms the basis of the analysis. The individual utility model underlying this framework can accommodate the arbitrary bundling of program networks into services for sale to consumers by cable systems. It therefore provides a natural framework for measuring the impact of the Cable Act: whereas changes in the set of services offered by systems changes the set of choices facing consumers in those markets, changes in the programming across services changes the utility to each of those choices. Explicit aggregation over both individuals and choices permits estimation using available observations on a cross-section of cable markets from before and after the Cable Act. The results indicate that while households in the median market could have expected to receive welfare gains of

Chapter 7 – The Economics of Television and Online Video Markets

0.91 per month, they instead received welfare losses of

Quality Overprovision in Cable Television Markets

0.33 per month, equivalent to a 4.3% increase in the price of Basic Service. Given these results, the flexibility of the modeling framework is exploited to simulate the effects of an alternative regulatory mechanism, that of untying of Basic Service from all other cable services. In the median market, households would be indifferent between such a policy and maintaining the tie but reducing the price of Basic Service by 18.7%. This is coincidentally just slightly higher than the final price reductions mandated by the Act.

The Regulation of Public Service Broadcasters: Should There Be More Advertising on Television?

Television is the dominant entertainment medium for hundreds of millions. This chapter surveys the economic forces that determine the production and consumption of this content. It presents recent trends in television and online video markets, both in the US and internationally, and describes the state of theoretical and empirical research on these industries. A number of distinct themes emerge, including the growing importance of the pay-television sector, the role played by content providers (channels), distributors, and negotiations between them in determining market outcomes, and concerns about the effects of market power throughout this vertical structure. It also covers important but unsettled topics including the purpose for and effects of both the old (Public Service Broadcasters) and the new (online video markets). Open theoretical and empirical research questions are highlighted throughout.

Uncertainty and Learning in Pharmaceutical Demand

Television is the dominant entertainment medium for hundreds of millions. This chapter surveys the economic forces that determine the production and consumption of this content. It presents recent trends in television and online video markets, both in the US and internationally, and describes the state of theoretical and empirical research on these industries. A number of distinct themes emerge, including the growing importance of the pay-television sector, the role played by content providers (channels), distributors, and negotiations between them in determining market outcomes, and concerns about the effects of market power throughout this vertical structure. It also covers important but unsettled topics including the purpose for and effects of both the old (Public Service Broadcasters) and the new (online video markets). Open theoretical and empirical research questions are highlighted throughout.