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The Welfare Effects of Endogenous Quality Choice in Cable Television Markets

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  • Crawford, Gregory S.
  • 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. paid-television 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.

Suggested Citation

  • Crawford, Gregory S. & Shcherbakov, Oleksandr & Shum, Matthew, 2015. "The Welfare Effects 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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    References listed on IDEAS

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    1. 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.
    2. Robin Lee & Michael Whinston & Ali Yurukoglu & Gregory Crawford, 2013. "The Welfare Effects of Vertical Integration in Multichannel Television Markets," 2013 Meeting Papers 81, Society for Economic Dynamics.
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    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.
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    Citations

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    Cited by:

    1. Ying Fan & Chenyu Yang, 2014. "Competition, Product Proliferation and Welfare: A Study of the U.S. Smartphone Market," Working Papers 14-14, NET Institute.
    2. Crawford, Gregory S., 2012. "Endogenous product choice: A progress report," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 315-320.
    3. 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.
    4. 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.
    5. 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.
    6. Marini, Marco A., 2016. "Collusive Agreements in Vertically Differentiated Markets," MPRA Paper 75369, University Library of Munich, Germany.
    7. 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.
    8. 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.).
    9. Chatain, Olivier & Eizenberg, Alon, 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.
    10. 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.
    11. 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.
    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. Gregory S. Crawford, 2015. "The economics of television and online video markets," ECON - Working Papers 197, Department of Economics - University of Zurich.
    14. Juan Daniel Oviedo & Julian Hidalgo, 2014. "The impact of broadband quality standards on Internet services market structure In colombia," DOCUMENTOS DE TRABAJO 012232, UNIVERSIDAD DEL ROSARIO.
    15. Crawford, Gregory S., 2015. "The Economics of Television and Online Video Markets," CEPR Discussion Papers 10676, C.E.P.R. Discussion Papers.
    16. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2015. "Endogenous Mergers in Vertically Differentiated Markets," MPRA Paper 68318, University Library of Munich, Germany.

    More about this item

    Keywords

    cable television; endogenous quality; imperfect competition; industrial organization; monopoly; pay television; quality markup; welfare;

    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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