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

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