Estimating the Effects of a la Carte Pricing: The Case of Cable Television

32 Pages Posted: 20 Jan 2008  

Adam D. Rennhoff

Middle Tennessee State University

Konstantinos Serfes

Drexel University - School of Economics

Date Written: January 18, 2008

Abstract

Consumer groups have been complaining about rising cable television prices. One proposed solution to combat these rising rates is to allow consumers to choose cable channels on a channel-by-channel basis (so-called a la carte offerings). In this paper, we explore the likely implications of a government regulation that would require cable and satellite operators to offer television channels on an a la carte basis. Using a policy simulation in which we explicitly model the strategic interaction between cable providers and programming networks, we find that consumer welfare goes up unambiguously under a la carte pricing. The expected monthly expenditure per household falls by approximately 15 to 20 percent and consumer welfare increases considerably. On the other hand, even ignoring the (technological) fixed costs associated with compliance with an a la carte regulation, we find that cable operator profits will fall. Finally, as we might expect, some programming networks benefit from a la carte pricing, while others are harmed (due, at least partially, to increased competition among close substitutes).

Keywords: discrete-choice models, upstream-downstream, bundling, television

JEL Classification: D43, K20, L13

Suggested Citation

Rennhoff, Adam D. and Serfes, Konstantinos, Estimating the Effects of a la Carte Pricing: The Case of Cable Television (January 18, 2008). Available at SSRN: https://ssrn.com/abstract=1085392 or http://dx.doi.org/10.2139/ssrn.1085392

Adam D. Rennhoff

Middle Tennessee State University ( email )

P.O. Box 27
MTSU
Murfreesboro, TN 37132
United States
615-898-2931 (Phone)

HOME PAGE: http://mtweb.mtsu.edu/rennhoff

Konstantinos Serfes (Contact Author)

Drexel University - School of Economics ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

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