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The discriminatory incentives to bundle in the cable television industry

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  • Gregory Crawford

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Abstract

An influential theoretical literature supports a discriminatory explanation for product bundling: it reduces consumer heterogeneity, extracting surplus in a manner similar to 2nd-degree price discrimination. This paper tests this theory and quantifies its importance in the cable television industry. The results provide strong support for the theory and suggest that bundling an average top-15 cable network yields a heterogeneity reduction equal to a 6.0% increase in firm profits (and 5.5% reduction in consumers surplus). The results are robust to alternative explanations for bundling.

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File URL: http://hdl.handle.net/10.1007/s11129-007-9031-7
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Bibliographic Info

Article provided by Springer in its journal Quantitative Marketing and Economics.

Volume (Year): 6 (2008)
Issue (Month): 1 (March)
Pages: 41-78

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Handle: RePEc:kap:qmktec:v:6:y:2008:i:1:p:41-78

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Web page: http://www.springerlink.com/link.asp?id=111240

Related research

Keywords: Bundling; Price discrimination; Cable television; L12; M31; L96; L40; L50; C31;

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References

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  1. Yannis Bakos & Erik Brynjolfsson, 1999. "Bundling Information Goods: Pricing, Profits, and Efficiency," Management Science, INFORMS, vol. 45(12), pages 1613-1630, December.
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  3. Joshua Angrist & Alan B. Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," NBER Working Papers 8456, National Bureau of Economic Research, Inc.
  4. Waterman, David & Weiss, Andrew A., 1996. "The effects of vertical integration between cable television systems and pay cable networks," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 357-395.
  5. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
  6. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany.
  7. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-42, March.
  8. McAfee, R Preston & McMillan, John & Whinston, Michael D, 1989. "Multiproduct Monopoly, Commodity Bundling, and Correlation of Values," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 371-83, May.
  9. Salinger, Michael A, 1995. "A Graphical Analysis of Bundling," The Journal of Business, University of Chicago Press, vol. 68(1), pages 85-98, January.
  10. Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 159-187, February.
  11. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages S211-30, January.
  12. Adam D. Rennhoff & Konstantinos Serfes, 2009. "The Role of Upstream-Downstream Competition on Bundling Decisions: Should Regulators Force Firms to Unbundle?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(2), pages 547-588, 06.
  13. Griliches, Zvi & Cockburn, Iain, 1994. "Generics and New Goods in Pharmaceutical Price Indexes," American Economic Review, American Economic Association, vol. 84(5), pages 1213-32, December.
  14. Chae, Suchan, 1992. "Bundling subscription TV channels : A case of natural bundling," International Journal of Industrial Organization, Elsevier, vol. 10(2), pages 213-230, June.
  15. Stole, Lars A., 2007. "Price Discrimination and Competition," Handbook of Industrial Organization, Elsevier.
  16. Jerry HAUSMAN & Gregory LEONARD & J. Douglas ZONA, 1994. "Competitive Analysis with Differentiated Products," Annales d'Economie et de Statistique, ENSAE, issue 34, pages 159-180.
  17. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  18. repec:fth:prinin:455 is not listed on IDEAS
  19. Chipty, Tasneem, 1995. "Horizontal Integration for Bargaining Power: Evidence from the Cable Television Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(2), pages 375-97, Summer.
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Citations

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Cited by:
  1. Justin Ho & Katherine Ho & Julie Holland Mortimer, 2008. "The Use of Full-line Forcing Contracts in the Video Rental Industry," NBER Working Papers 14588, National Bureau of Economic Research, Inc.
  2. Hanming Fang & Peter Norman, 2008. "Optimal Provision of Multiple Excludable Public Goods," NBER Working Papers 13797, National Bureau of Economic Research, Inc.
  3. Fang,H. & Norman,P., 2003. "To bundle or not to bundle," Working papers 18, Wisconsin Madison - Social Systems.
  4. Takanori Adachi & Takeshi Ebina & Makoto Hanazono, 2011. "Option Package Bundling," KIER Working Papers 785, Kyoto University, Institute of Economic Research.
  5. Joao Macieira & Pedro Pereira & Joao Vareda, 2013. "Bundling Incentives in Markets with Product Complementarities: The Case of Triple-Play," Working Papers 13-15, NET Institute.
  6. Chenghuan Sean Chu & Phillip Leslie & Alan Sorensen, 2011. "Bundle-Size Pricing as an Approximation to Mixed Bundling," American Economic Review, American Economic Association, vol. 101(1), pages 263-303, February.
  7. Harald Nygard Bergh & Hans Jarle Kind & Bjørn-Atle Reme & Lars Sørgard, 2012. "Competition between Content Distributors in Two-Sided Markets," CESifo Working Paper Series 3885, CESifo Group Munich.
  8. David S. Evans & Michael Salinger, 2004. "An Empirical Analysis of Bundling and Tying: Over-the-Counter Pain Relief and Cold Medicines," CESifo Working Paper Series 1297, CESifo Group Munich.
  9. Jeffrey T. Prince & Shane Greenstein, 2011. "Does Service Bundling Reduce Churn?," Working Papers 2011-05, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  10. Chenghuan Sean Chu, 2008. "The effect of satellite entry on product quality for cable television," Finance and Economics Discussion Series 2008-12, Board of Governors of the Federal Reserve System (U.S.).
  11. GINSBURGH, Victor & ZANG, Israel, 2005. "Bundling by competitors and the sharing of profits," CORE Discussion Papers 2005007, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. David S. Evans & Michael Salinger, 2005. "Curing Sinus Headaches and Tying Law: An Empirical Analysis of Bundling Decongestants and Pain Relievers," CESifo Working Paper Series 1519, CESifo Group Munich.
  13. Gregory Crawford & Evan Kwerel & Jonathan Levy, 2008. "Economics at the FCC: 2007–2008," Review of Industrial Organization, Springer, vol. 33(3), pages 187-210, November.
  14. Leslie Marx, 2006. "Economics at the Federal Communications Commission," Review of Industrial Organization, Springer, vol. 29(4), pages 349-368, December.
  15. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, vol. 102(2), pages 643-85, April.

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