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The welfare effects of endogenous quality choice in cable television markets

Author

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  • Gregory S. Crawford
  • Oleksandr Shcherbakov
  • Matthew Shum

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 importance for welfare of market power over price versus market power over quality. For U.S. cable-television markets between 1997-2006, we find that prices are 33% to 74% higher and qualities 23% to 55% higher than socially optimal. This "quality inflation" contradicts classic results in the literature and reflects our flexible specification of consumer preferences. Furthermore, we find market power over quality is responsible for 54% of the total welfare change from endogenous prices and qualities.

Suggested Citation

  • Gregory S. Crawford & Oleksandr Shcherbakov & Matthew Shum, 2015. "The welfare effects of endogenous quality choice in cable television markets," ECON - Working Papers 202, Department of Economics - University of Zurich.
    • Handle: RePEc:zur:econwp:202
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    References listed on IDEAS

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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. Crawford, Gregory S., 2012. "Endogenous product choice: A progress report," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 315-320.
    3. Brueckner, Jan K. & Luo, Dan, 2014. "Measuring strategic firm interaction in product-quality choices: The case of airline flight frequency," Economics of Transportation, Elsevier, vol. 3(1), pages 102-115.
    4. Andrew Sweeting, 2007. "Dynamic Product Repositioning in Differentiated Product Markets: The Case of Format Switching in the Commercial Radio Industry," NBER Working Papers 13522, National Bureau of Economic Research, Inc.
    5. 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.
    6. 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.
    7. 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.).
    8. Gerlach, Heiko & Zheng, Xuemei, 2018. "Preferences for green electricity, investment and regulatory incentives," Energy Economics, Elsevier, vol. 69(C), pages 430-441.
    9. 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).

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    More about this item

    Keywords

    Industrial organization; endogenous quality; imperfect competition; monopoly; cable television; quality distortions; welfare; quality markup;
    All these keywords.

    JEL classification:

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

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