DP10793 The Welfare Effects of Endogenous Quality Choice in Cable Television Markets

Author(s): Gregory S. Crawford, Alex Shcherbakov, Matthew Shum
Publication Date: August 2015
Keyword(s): cable television, endogenous quality, imperfect competition, industrial organization, monopoly, pay television, quality markup, welfare
JEL(s): C51, L13, L15, L82, L96
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10793

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 welfare consequences of market power over price and quality. For U.S. paid-television markets during 1997-2006, we find that not only are cable monopolists' prices 33% to 74% higher than marginal costs, but qualities are also 23% to 55% higher than socially optimal and the welfare costs of each are similar in magnitude. Such evidence for "quality inflation" by monopolists is at odds with classic results in the literature.