Quantitative Marketing and Economics

, Volume 6, Issue 1, pp 41–78 | Cite as

The discriminatory incentives to bundle in the cable television industry

Article

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

Bundling Price discrimination Cable television 

JEL Classification

L12 M31 L96 L40 L50 C31 

References

  1. Adams, W., & Yellen, J. (1976). Commodity bundling and the burden of monopoly. Quarterly Journal of Economics, 90, 475–498.CrossRefGoogle Scholar
  2. Angrist, J., & Krueger, A. (2001). Instrumental variables and the search for identification: From supply and demand to natural experiments. NBER Working Paper 8456.Google Scholar
  3. Armstrong, M. (1996). Multiproduct non-linear pricing. Econometrica, 64(1), 51–75.CrossRefGoogle Scholar
  4. Armstrong, M. (1999). Price discrimination by a multi-product firm. Review of Economic Studies, 66, 151–168.CrossRefGoogle Scholar
  5. Bakos, Y., & Brynjolfsson, E. (1999). Bundling information goods: Pricing, profits, and efficiency. Management Science, 45(2), 1613–1630.CrossRefGoogle Scholar
  6. Bakos, Y., & Brynjolfsson, E. (2000). Bundling and competition on the Internet. Marketing Science, 19(1), 63–82.CrossRefGoogle Scholar
  7. Berry, S. (1994). Estimating discrete choice models of product differentiation. Rand Journal of Economics, 25(2), 242–262.CrossRefGoogle Scholar
  8. Berry, S., Levinsohn, J., & Pakes, A. (1995). Automobile prices in market equilibrium. Econometrica, 63, 841–890.CrossRefGoogle Scholar
  9. Bresnahan, T., & Gordon, R. (1996). The economics of new goods: An introduction. In T. Bresnahan, R. Gordon (Eds.), The Economics of New Goods. University of Chicago Press.Google Scholar
  10. Carlton, D., & Perloff, J. (2001). Modern Industrial Organization (3rd ed.). Harper CollinsGoogle Scholar
  11. Chae, S. (1992). Bundling subscription TV channels: A case of natural bundling. International Journal of Industrial Organization, 10, 213–230.CrossRefGoogle Scholar
  12. Chipty, T. (1995). Horizontal integration for bargaining power: Evidence from the cable television industry. Journal of Economics and Management Strategy, 4(2), 375–97.CrossRefGoogle Scholar
  13. Chipty, T. (2001). Vertical integration, market foreclosure, and consumer welfare in the cable television industry. American Economic Review, 91(3), 428–453.CrossRefGoogle Scholar
  14. Crawford, G. (2000). The impact of the 1992 cable act on household demand and welfare. RAND Journal of Economics, 31(3), 422–449.CrossRefGoogle Scholar
  15. Crawford, G., & Cullen, J. (2007). Bundling, product choice, and efficiency: Should cable television networks be offered À La Carte? Information Economics and Policy (in press).Google Scholar
  16. Crawford, G., & Shum, M. (2006). Empirical modeling of endogenous quality choice: The case of cable television. Mimeo, University of Arizona.Google Scholar
  17. Crawford, G., & Yurukoglu, A. (2007). Demand, pricing, and bundling in subscription television markets. Mimeo, University of Arizona.Google Scholar
  18. Einav, L. (2007). Seasonality in the U.S. motion picture industry. RAND Journal of Economics, 38(1).Google Scholar
  19. FCC (2003). 2002 report on cable industry prices. Federal Communications Commission. Available at http://www.fcc.gov/mb/csrptpg.html.
  20. FCC (2006). Further report on the packaging and sale of video programming to the public. Federal Communications Commission, February 2006. Available at http://www.fcc.gov/mb/csrptpg.html.
  21. GAO (2003). Issues related to competition and subscriber rates in the cable television industry. Discussion paper, General Accounting Office, GAO-04-8.Google Scholar
  22. Gentile, G. (2004). ESPN ends ugly fight with Cox over fees. Associated Press.Google Scholar
  23. Griliches, Z., & Cockburn, I. (1994). Generics and new goods in pharmaceutical price indexes. American Economic Review, 84(5), 1213–1232.Google Scholar
  24. Halfon, J. (2003). The failure of cable deregulation: A blueprint for creating a competitive, proconsumer cable television marketplace. United States Public Interest Research Group.Google Scholar
  25. Hausman, J., Leonard, G., & Zona, D. (1994). Competitive analysis with differentiated products. Annales d’Economie et de Statistique, 34, 159–180.Google Scholar
  26. Hazlett, T., & Spitzer, M. (1997). Public Policy Towards Cable Television: The Economics of Rate Controls. MIT Press.Google Scholar
  27. Kagan World Media (1998). Economics of Basic Cable Television Networks. Discussion paper, Kagan World Media.Google Scholar
  28. Kagan Media Research (2005). À la Carte pricing makes great theory, but tv channel bundling tough to beat. Kagan Media Research, December 2005. Available at http://www.ncta.com/IssueBrief.aspx?contentId=15.
  29. Lancaster, K. (1971). Consumer Demand: A New Approach. Columbia University Press.Google Scholar
  30. McAfee, R. P., McMillan, J., & Whinston, M. (1989). Multiproduct monopoly, commodity bundling, and correlation of values. Quarterly Journal of Economics, 103, 371–383.CrossRefGoogle Scholar
  31. Mitchener, B., & Kanter, J. (2004). EU member states back record fine for microsoft. Wall Street Journal, March 24, 2004.Google Scholar
  32. Nalebuff, B. (2004). Bundling as an entry barrier. Quarterly Journal of Economics, 119(1), 159–187.CrossRefGoogle Scholar
  33. NCTA (1998). Cable television developments. Discussion paper, National Cable Television Association, Available at http://www.ncta.com.
  34. Nevo, A. (2001). Measuring market power in the ready-to-eat cereal industry. Econometrica, 69, 307–342.CrossRefGoogle Scholar
  35. Noam, E. M. (1985). Economics of scale in cable television: A multiproduct analysis. In E. M. Noam (Ed.), Video Media Competition: Regulation, Economics, and Technology. Columbia University Press.Google Scholar
  36. Petrin, A. (2003). Quantifying the benefits of new products: The case of the minivan. Journal of Political Economy, 110, 705–729.CrossRefGoogle Scholar
  37. Rennhoff, A., & Serfes, K. (2005). The role of upstream-downstream competition on bundling decisions: Should regulators force firms to unbundle? Mimeo, Drexel University.Google Scholar
  38. Reuters (2003). US lawmaker urges a la Carte cable channel rates. Reuters News Service.Google Scholar
  39. Rochet, J.-C., & Chone, P. (1998). Ironing, sweeping, and multidimensional screening. Econometrica, 66(4), 783–826.CrossRefGoogle Scholar
  40. Rochet, J.-C., & Stole, L. (2000). The economics of multidimensional screening. Mimeo, University of Chicago.Google Scholar
  41. Salinger, M. (1995). A graphical analysis of bundling. Journal of Business, 68(1), 85–98.CrossRefGoogle Scholar
  42. Saloner, G., Shepard, A., & Podolny, J. (2001). Strategic Management. Wiley.Google Scholar
  43. Schmalensee, R. (1984). Gaussian demand and commodity bundling. Journal of Business, 62, S211–S230.Google Scholar
  44. Squeo, A. M., & Flint, J. (2004). Should cable be a la Carte not flat rate? Wall Street Journal.Google Scholar
  45. Stigler, G. (1963). United States v. Loew’s Inc.: A note on block booking. In P. Kurland (Ed.), The Supreme Court Review: 1963 (pp. 152–157). University of Chicago Press.Google Scholar
  46. Stigler, G. (1968). A note on block booking. In G. Stigler, R. D. Irwin (Eds.), The Organization of Industry.Google Scholar
  47. Stole, L. (2003). Price discrimination in competitive environments. Mimeo, University of Chicago.Google Scholar
  48. Thompson, A. (2006). NFL v. cable is turning into a real nailbiter. Wall Street Journal.Google Scholar
  49. Varian, H. (2003). Intermediate Microeconomics (6th ed.). NortonGoogle Scholar
  50. Waterman, D. H., & Weiss, A. A. (1996). The effects of vertical integration between cable television systems and pay cable networks. Journal of Econometrics, 72, 357–95.CrossRefGoogle Scholar
  51. Whinston, M. (1990). Tying, foreclosure, and exclusion. American Economic Review, 80(4), 837–859.Google Scholar
  52. Wildman, S., & Owen, B. (1985). Program competition, diversity, and multichannel bundling in the New Video Industry. In E. M. Noam (Ed.) Video Media Competition: Regulation, Economics, and Technology. Columbia University Press.Google Scholar
  53. Xiao, P., Chan, T., & Narasimhan, C. (2006). Product bundles under three-part tariffs. Mimeo, Washington University.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of ArizonaTucsonUSA

Personalised recommendations