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The discriminatory incentives to bundle in the cable television industry


Crawford, Gregory S (2008). The discriminatory incentives to bundle in the cable television industry. Quantitative Marketing and Economics, 6(1):41-78.

Abstract

An influential theoretical literature supports a discriminatory explanation for product bundling: it reduces consumer heterogeneity, extracting surplus in a manner similar to second-degree price discrimination. This paper tests this theory and quantifies its importance in the cable television industry. The results provide qualified support for the theory. While bundling of general-interest cable networks is estimated to have no discriminatory effect, bundling an average top-15 special-interest cable network significantly increases the estimated elasticity of cable demand. Calibrating these results to a simple model of bundle demand with normally distributed tastes suggests that such bundling yields a heterogeneity reduction equal to a 4.7% increase in firm profits (and 4.0% reduction in consumers surplus). The results are robust to alternative explanations for bundling.

Abstract

An influential theoretical literature supports a discriminatory explanation for product bundling: it reduces consumer heterogeneity, extracting surplus in a manner similar to second-degree price discrimination. This paper tests this theory and quantifies its importance in the cable television industry. The results provide qualified support for the theory. While bundling of general-interest cable networks is estimated to have no discriminatory effect, bundling an average top-15 special-interest cable network significantly increases the estimated elasticity of cable demand. Calibrating these results to a simple model of bundle demand with normally distributed tastes suggests that such bundling yields a heterogeneity reduction equal to a 4.7% increase in firm profits (and 4.0% reduction in consumers surplus). The results are robust to alternative explanations for bundling.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Economics, Econometrics and Finance (miscellaneous)
Social Sciences & Humanities > Marketing
Uncontrolled Keywords:Marketing, economics, econometrics and finance (miscellaneous), bundling, price discrimination, cable television
Language:English
Date:March 2008
Deposited On:25 Sep 2019 10:35
Last Modified:31 Jul 2020 03:40
Publisher:Springer
ISSN:1570-7156
OA Status:Closed
Publisher DOI:https://doi.org/10.1007/s11129-007-9031-7

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