Another Look at Local Franchise Regulation and State Commission Regulation: Do They Really Matter?

Abstract

While economic theories suggest that firm behavior may diverge over time under local franchise regulation and state commission regulation, empirical studies on that issue are scant. By exploiting the facts that: both types of regulation coexisted in the cable television industry prior to federal deregulation; and the starting years of cable systems varied widely, this paper approaches the issue. Two empirically testable hypotheses are set. First, market power exercised varies with system ages. Second, the age-dependent path of the market power exercised differs under local franchise regulation and state commission regulation. The paper finds evidence supporting these hypotheses. Though some qualifications are required due to the use of cross-sectional instead of panel data, the evidence presented here is highly suggestive that regulator-firm relations have played a role and might be a cause of the differing monopoly powers exercised.