The Welfare Effects of Endogenous Quality Choice in Cable Television Markets
University of Zurich, Department of Economics, Working Paper No. 202
41 Pages Posted: 8 Oct 2015
There are 2 versions of this paper
The Welfare Effects of Endogenous Quality Choice in Cable Television Markets
The Welfare Effects of Endogenous Quality Choice in Cable Television Markets
Date Written: August 27, 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 importance for welfare of market power over price versus market power over quality. For U.S. cable-television markets between 1997-2006, we find that prices are 33% to 74% higher and qualities 23% to 55% higher than socially optimal. This "quality inflation" contradicts classic results in the literature and reflects our flexible specification of consumer preferences. Furthermore, we find market power over quality is responsible for 54% of the total welfare change from endogenous prices and qualities.
Keywords: Industrial organization, endogenous quality, imperfect competition, monopoly, cable television, quality distortions, welfare, quality markup
JEL Classification: L15, L13, L82, L96, C51
Suggested Citation: Suggested Citation