Economics of the cable television industry.

Abstract

This paper develops an economic analysis of the cable television industry. Emphasis is given to: firm behavior; the effects of cable regulations; and, consumer behavior. The distinctive technological structure of the cable industry has important economic implications both for the demand for cable services and for firm behavior. Essay I of the dissertation presents an overview of the cable television industry and describes different aspects of the industry including industry structure and how cable companies operate. Consideration is given to the effects of the franchise system on industry structure and examines the potential for competition between cable firms when municipalities grant non-exclusive franchises. A brief history of cable regulations is provided with a report on current and future regulation proposals and issues relating to the re-regulation of the cable industry. Essay II presents a theoretical analysis of the consumer choice problem and of the producer pricing decision. Specifically, predictions for consumer behavior assuming consumers are addicted to television are contrasted with the predictions made assuming consumers are initially uncertain of their true preferences for cable TV. The results suggest that observed behavior may be due to a learning effect rather than to addictive behavior. Given this assumption, the paper models the consequent optimal two-part pricing strategies for the cable operator. Essay III examines consumer demand and firm pricing decisions by developing an empirical model of the demand for basic cable services. In particular, this paper examines how the structure of consumer preferences affects the demand for cable television and considers the implications for firm pricing behavior of variations in the distribution of consumer preferences for cable. Using two-stage least squares estimation, prices for basic cable are estimated as a function of quantity demanded (the proportion of people with access to cable who subscribe), median income, TV market size and other demographic variables relating to an individual's demand for cable TV. Estimates of demand elasticities are used to estimate firm pricing behavior.