The Welfare Effects of Endogenous Quality Choice in Cable Television Markets
43 Pages Posted: 4 Sep 2015
Date Written: August 2015
We measure the welfare consequences of endogenous quality choice in imperfectly competitive markets. We introduce the concept of a "quality markup" and measure the relative welfare consequences of market power over price and quality. For U.S. paid-television markets during 1997-2006, we find that not only are cable monopolists' prices 33% to 74% higher than marginal costs, but qualities are also 23% to 55% higher than socially optimal and the welfare costs of each are similar in magnitude. Such evidence for "quality inflation" by monopolists is at odds with classic results in the literature.
Keywords: cable television, endogenous quality, imperfect competition, industrial organization, monopoly, pay television, quality markup, welfare
JEL Classification: C51, L13, L15, L82, L96
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