Quantitative Marketing and Economics

, Volume 6, Issue 1, pp 41–78

The discriminatory incentives to bundle in the cable television industry

Article

DOI: 10.1007/s11129-007-9031-7

Cite this article as:
Crawford, G.S. Quant Market Econ (2008) 6: 41. doi:10.1007/s11129-007-9031-7

Abstract

An influential theoretical literature supports a discriminatory explanation for product bundling: it reduces consumer heterogeneity, extracting surplus in a manner similar to second-degree price discrimination. This paper tests this theory and quantifies its importance in the cable television industry. The results provide qualified support for the theory. While bundling of general-interest cable networks is estimated to have no discriminatory effect, bundling an average top-15 special-interest cable network significantly increases the estimated elasticity of cable demand. Calibrating these results to a simple model of bundle demand with normally distributed tastes suggests that such bundling yields a heterogeneity reduction equal to a 4.7% increase in firm profits (and 4.0% reduction in consumers surplus). The results are robust to alternative explanations for bundling.

Keywords

BundlingPrice discriminationCable television

JEL Classification

L12M31L96L40L50C31

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of ArizonaTucsonUSA