Size Effects in Bargaining between a Network and System Operators in the Cable Television Industry
19 Pages Posted: 20 Jul 2012
Date Written: August 15, 2006
Abstract
Our work differs from the earlier work in several ways. First, we adopt the Shapley value as a bargaining solutions concept. It is well-known that the Shapley value, rather than the Nash bargaining solution, is more appropriate when partial coalitions are possible — for example, a coalition between a network and a subset of MSOs. We show, however, that in a noncooperative setting, the Shapley allocation is equivalent to the equilibrium allocations produced by simultaneous bilateral Nash bargaining between a network and (in our model) two MSOs. Second, we consider the choices networks and MSOs make regarding programming budgets and subscriber fees, respectively, and model the joint relationship between programming budgets, subscription fees, and operators’ subscriber counts. Allowing the network’s programming budget to vary with the number of MSOs that license its programming is a critical departure from the models of Chipty and Snyder (1999), Raskovich (2003), and Adilov and Alexander (2006). When a network adjusts its programming budget in response to variation in the number of cable operators it is able to sign up, no buyer is pivotal in the sense of Raskovich and Adilov and Alexander. Still, we find that the effects of growth through merger do not necessarily increase the joint profits of the merging MSOs. Third, we compare the noncooperative solution to a cooperative arrangement between the same parties where surplus is also allocated according to the Shapley rule.
Recently, Bykowsky, Kwasnica, and Sharkey (2002) employed an experimental analysis to evaluate the effects of MSO size and system ownership concentration on the bargaining over the license fees that cable system operators pay program providers. Two findings among other things are notable. First, the bargaining power, measured in terms of the percentage of total surplus captured, of a small cable operator with a market share of 27% does not substantially differ from the bargaining power of a large cable operator with a market share of 51%. Second, cable operators pay lower total license fees in a market that includes two major system operators with market shares of 44% and 39% than in a market that includes a single large cable operator with a 51% market share.
These findings seem to be consistent with our results in the cooperative set-up: i.e., a larger system operator may not obtain greater per-franchise profits, and merger between system operators does not increase aggregate profits of merged parties. The Bykowski, Kwasnica and Sharkey cable market differs from that modeled here, however, in that they did not allow the network’s programming budget to vary with number of cable subscribers granted access to the network by their local cable operators. The paper is organized as follows. Section 2 builds the model of the cable television industry that comprises of a program provider and multiple system operators. Section 3 explains the Shapley value, which we adopt as the solution of bargaining among them. Section 4 considers the case when the program provider and system operators determine programming budget and subscription fees noncooperatively, while section 5 deals with the cooperative version. Section 6 concludes with a summary and discussions.
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