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The welfare effects of endogenous quality choice in cable television markets


Crawford, Gregory; Shcherbakov, Oleksandr; Shum, Matthew (2015). The welfare effects of endogenous quality choice in cable television markets. Working paper series / Department of Economics 202, University of Zurich.

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.

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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:L15, L13, L82, L96, C51
Uncontrolled Keywords:Industrial organization, endogenous quality, imperfect competition, monopoly, cable television, quality distortions, welfare, quality markup
Language:English
Date:August 2015
Deposited On:25 Aug 2015 13:12
Last Modified:16 Aug 2017 12:44
Series Name:Working paper series / Department of Economics
Number of Pages:40
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp202.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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