The Welfare Effects of Monopoly Quality Choice: Evidence from Cable Television Markets

We measure the welfare consequences of market power over quality in cable television markets. We extend the analytical approach commonly used in the theoretical screening literature to specify an empirical model that endogenizes the prices and qualities offered by multiproduct monopoly cable television systems. We estimate the model on an unbalanced panel of xxx cable systems between xxx and 2000. Preliminary results using a single cross-section in 1998 and a simplified empirical model show significant degradation in the quality of offered cable service relative to first-best levels, the welfare consequences of which are roughly half that from monopoly pricing. The proposed empirical framework readily adapts itself to analyzing competition in prices and qualities. *** Preliminary. Comments welcome. Please do not cite or quote. *** This draft is preliminary. Please do not cite or quote. Comments welcome. We would like to thank Eugenio Miravete, Gary Biglaiser, and seminar participants at Arizona, UCLA, Northwestern and the CEPR Conference on Competition in the New Economy for helpful comments. Special thanks goes to Chenghuan (Sean) Chu for providing the data used in this analysis and to Ali Yurukoglu, with whom we have had many fruitful discussions about cable television markets. Correspondance may be sent to Gregory S. Crawford, Department of Economics, University of Warwick, Coventry, CV4 7AL, United Kingdom, phone +44 2476 523470, email [email protected], Matthew Shum, Department of Economics, 301D Baxter Hall, MC 228-77, California Institute of Technology, Pasadena, CA 91125, phone 626.395.4022, email [email protected], or Olexsandr (Alex) Shcherbakov, Department of Economics, University of Mannheim, L7, 3-5, 68131 Mannheim, Germany, phone +49 621 181 1838, email [email protected].