Spatial Competition in the Network Television Industry

Abstract

We present an empirical study of spatial competition and a methodology to estimate demand for products with unobservable characteristics. Using panel data, we estimate a discrete choice model with latent product attributes and unobserved heterogenous consumer preferences. Our application of the methodology to the network television industry yields estimates that are consistent with experts' views. Given our estimates, we compute Nash equilibria of a product location game, and find that firms' observed strategies (such as the degree of product differentiation) are generally optimal. Discrepancies between actual and optimal strategies reflect the networks' adherence to "rules of thumb," and possibly, bounded rationality behavior.

Keywords: Spatial competition, discrete choice, panel data, latent variables, consumer heterogeneity, maximum simulated likelihood, network television, state dependence

JEL Classification: C51, D12, D40, L10, L82