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Duke Economics Working Paper #97-32

The Impact of the 1992 Cable Act on Consumer Demand and Welfare: A Discrete-Choice, Differentiated Products Approach

Gregory S. Crawford

Abstract

The regulations implemented in accord with the 1992 Cable Act legislated that the per-channel cable prices fall by 10-17% from their September, 1992 levels. Upon implementation, however, while cable prices did show moderate declines, cable expenditures did not - in 1/3 of cable markets, the average consumer's cable bill actually increased. In addition, the services provided by some systems and the programming provided on those services also changed. This paper measures the benefit to consumers of the Cable Act in light of these changes in services, programming, and prices by cable systems. A Discrete-Choice Differentiated Product model of demand for cable television service forms the basis of the analysis. The individual utility model underlying this framework can accommodate the arbitrary bundling of program networks into services for sale to consumers by cable systems. It therefore provides a natural framework for measuring the impact of the Cable Act: whereas changes in the set of services offered by systems changes the set of choices facing consumers in those markets, changes in the programming across services changes the utility to each of those choices. Explicit aggregation over both individuals and choices permits estimation using available observations on a cross-section of cable markets from before and after the Cable Act. The results indicate that while households in the median market could have expected to receive welfare gains of $0.91 per month, they instead received welfare losses of $0.33 per month, equivalent to a 4.3% increase in the price of Basic Service. Given these results, the flexibility of the modeling framework is exploited to simulate the effects of an alternative regulatory mechanism, that of untying of Basic Service from all other cable services. In the median market, households would be indifferent between such a policy and maintaining the tie but reducing the price of Basic Service by 18.7%. This is coincidentally just slightly higher than the final price reductions mandated by the Act.

Key Words: cable television, bundling, 1992 Cable Act, welfare analysis.

JEL: L96, L50, C51

Published in RAND Journal of Economics, Vol. 31, No. 3, August 2000, pp. 422-449.

For additional information on this paper, go to Professor Crawford's Research page.