Fighting Bundles: The Effects of Competition on Second Degree Price Discrimination

Abstract

We study how changes in market structure affect how firms engage in second degree price discrimination. Specifically, we study how a large incumbent cable firm changes its menu of price-quality offerings and mixed bundles in response to entry. Competition strongly decreases the rate at which prices increase in quality and induces the incumbent to introduce additional medium-to-high quality offerings that the incumbent could have introduced absent competition but chose not to. Our findings are relevant for the broadband industry because they suggest that competition can improve broadband quality through direct pricing effects without any changes in investment in maximum quality.

Keywords: Second degree price discrimination, competition, broadband, cable television

JEL Classification: L1, L42