The Welfare Effects of Endogenous Quality Choice in Cable Television Markets

43 Pages Posted: 4 Sep 2015

See all articles by Gregory S. Crawford

Gregory S. Crawford

University of Zurich - Department of Economics

Oleksandr Shcherbakov

University of Mannheim

Matthew Shum

California Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: August 2015

Abstract

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

Suggested Citation

Crawford, Gregory S. and Shcherbakov, Oleksandr and Shum, Matthew, The Welfare Effects of Endogenous Quality Choice in Cable Television Markets (August 2015). CEPR Discussion Paper No. DP10793. Available at SSRN: https://ssrn.com/abstract=2655479

Gregory S. Crawford (Contact Author)

University of Zurich - Department of Economics ( email )

Sch├Ânberggasse 1
Z├╝rich, CH-8001
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/groupcrawford.html

Oleksandr Shcherbakov

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Matthew Shum

California Institute of Technology ( email )

Pasadena, CA 91125
United States

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