Testing for Structural Stability of the Demand for Subscription Television Service in the United States
Under a generalized dominant firm-competitive fringe model, the demand for cable television service will depend on cable rates and cost conditions affecting both the cable and noncable providers of subscription television service. A desirable attribute of this model is that it is possible to incorporate the competitive influence of noncable providers - i.e., DBS providers - on the demand for cable. To measure the competitive influence of the noncable providers (i.e., the competitive fringe), the DBS share of video subscribers in each franchise area is used in modeling the demand for subscription television service. If DBS service is a viable competitor to cable service and operates to constrain price increases by the dominant firm, DBS penetration should have a statistically significant impact on the analog and/or digital demand for cable service. After examining some important econometric issues including the appropriate functional specification, whether the error terms are homoscedastic, and the presence of outliers in the data, data from the 2002 FCC Annual Cable Price Survey were used to estimate the demand equations. Of significance is that the penetration of DBS in a franchise area has a quite significant and negative effect on both the number of analog cable subscribers and the number of digital cable subscribers. Finally, the question of whether the demand for analog cable service and the demand for digital cable service are structurally stable across various size cable systems is addressed. Using the cusum and cusum of squares tests, the results indicate that the demand for analog cable service for cable systems with more than 173,000 subscribers is statistically significantly different than the analog demand for cable service for smaller systems. One possible explanation is that DBS service is looked upon as a better substitute for subscription television service in areas where it has realized a greater market penetration.
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Volume (Year): 57 (2004)
Issue (Month): 2 ()
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