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The Welfare E ects of Endogenous Quality Choice in Cable Television Markets

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  • Crawford, Gregory
  • Shcherbakov, Oleksandr
  • Shum, Matthew

Abstract

We measure the welfare consequences of endogenous quality choice in imperfectly competitive markets. We introduce the concept of a "quality markup" and measure the relative welfare consequences of market power over price and quality. For U.S. paidtelevision markets during 1997†2006, we find that not only are cable monopolists' prices 33% to 74% higher than marginal costs, but qualities are also 23% to 55% higher than socially optimal and the welfare costs of each are similar in magnitude. Such evidence for "quality inflation" by monopolists is at odds with classic results in the literature.

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  • Crawford, Gregory & Shcherbakov, Oleksandr & Shum, Matthew, 2015. "The Welfare E ects of Endogenous Quality Choice in Cable Television Markets," CEPR Discussion Papers 10793, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10793
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    Cited by:

    1. Ying Fan & Chenyu Yang, 2020. "Competition, Product Proliferation, and Welfare: A Study of the US Smartphone Market," American Economic Journal: Microeconomics, American Economic Association, vol. 12(2), pages 99-134, May.
    2. Chenghuan Sean Chu, 2010. "The effect of satellite entry on cable television prices and product quality," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 730-764, December.
    3. Crawford, Gregory S., 2012. "Endogenous product choice: A progress report," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 315-320.
    4. Felix Oberholzer-Gee & Dennis A. Yao, 2018. "Integrated Strategy: Residual Market and Exchange Imperfections as the Foundation of Sustainable Competitive Advantage," Strategy Science, INFORMS, vol. 3(2), pages 463-480, June.
    5. Ying Fan, 2013. "Ownership Consolidation and Product Characteristics: A Study of the US Daily Newspaper Market," American Economic Review, American Economic Association, vol. 103(5), pages 1598-1628, August.
    6. Serna, Natalia & Riascos, Álvaro J. & Martin, Juan David, 2019. "Welfare effects of switching barriers through permanence clauses: Evidence from the mobiles market in Colombia," Telecommunications Policy, Elsevier, vol. 43(4), pages 310-323.
    7. Yanhao Wei, 2014. "Network Effects of Air Travel Demand, Second Version," PIER Working Paper Archive 14-041, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 17 Nov 2014.
    8. Marco A. Marini, 2018. "Collusive agreements in vertically differentiated markets," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume II, chapter 3, pages 34-56, Edward Elgar Publishing.
    9. Yanhao Wei, 2014. "The Network Effects of Air-Travel Demand," PIER Working Paper Archive 14-027, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    10. Eizenberg, Alon & Chatain, Olivier, 2015. "Demand Fluctuations, Capacity Constraints and Repeated Interaction: An Empirical Analysis of Service Quality Adjustments," CEPR Discussion Papers 10545, C.E.P.R. Discussion Papers.
    11. Corchón Luis Carlos & Zudenkova Galina, 2013. "The Welfare Effects of Location and Quality in Oligopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 1143-1178, July.
    12. Hidalgo, Julian & Oviedo, Juan D., 2014. "The impact of Broadband quality standards on Internet services market structure in Colombia," 25th European Regional ITS Conference, Brussels 2014 101435, International Telecommunications Society (ITS).
    13. Hongmin Li & Scott Webster & Gwangjae Yu, 2020. "Product Design Under Multinomial Logit Choices: Optimization of Quality and Prices in an Evolving Product Line," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 1011-1025, September.
    14. Crawford, Gregory S., 2012. "Endogenous Product Choice: A Progress Report," Economic Research Papers 270745, University of Warwick - Department of Economics.
    15. Gerlach, Heiko & Zheng, Xuemei, 2018. "Preferences for green electricity, investment and regulatory incentives," Energy Economics, Elsevier, vol. 69(C), pages 430-441.
    16. Gregory S. Crawford, 2015. "The economics of television and online video markets," ECON - Working Papers 197, Department of Economics - University of Zurich.
    17. Juan Daniel Oviedo & Julian Hidalgo, 2014. "The impact of broadband quality standards on Internet services market structure In colombia," Documentos de Trabajo 12232, Universidad del Rosario.
    18. Bauner, Christoph & Wang, Emily, 2019. "The effect of competition on pricing and product positioning: Evidence from wholesale club entry," International Journal of Industrial Organization, Elsevier, vol. 67(C).
    19. Crawford, Gregory, 2015. "The Economics of Television and Online Video Markets," CEPR Discussion Papers 10676, C.E.P.R. Discussion Papers.
    20. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2015. "Endogenous Mergers in Vertically Differentiated Markets," MPRA Paper 68318, University Library of Munich, Germany.

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    More about this item

    Keywords

    Welfare; Imperfect competition; Monopoly; Endogenous quality; Industrial organization; Cable television; Quality markup; quality distortions;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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