The Economics of Build-Out Rules in Cable Television

Abstract:     
Firms that wish to offer wireline, multichannel video programming services in direct competition with cable incumbents are being faced with calls by those incumbents and policymakers to "build-out" to entire communities as a pre-condition to receiving a franchise. This "build-out" requirement is often incorporated into the local cable franchising process. In this paper, we show that build-out mandates are actually counter-productive and serve primarily to deter new entry, increase the profits of incumbents, and harm consumers. Using both a theoretical model and an empirical simulation, we show that build-out rules cause new video entrants to bypass certain communities entirely and sharply lower the number of communities in which new network construction would be profitable. We show that consumer welfare is likely to be higher with "free entry" policies that impose no build-out requirement.

Number of Pages in PDF File: 23

Keywords: Cable Television, Build-out Rules, Entry, Franchising

JEL Classification: H79, K23, K29, L10, L11, L13, L50, L98, L99, O33

Accepted Paper Series