The Discriminatory Incentives to Bundle: The Case of Cable Television

A considerable theoretical literature supports a discriminatory explanation for product bundling: it sorts consumers in a manner similar to 2nd-degree price discrimination. The purpose of this paper is to test this theory and quantify its empirical importance in the cable television industry. Speci cally, demand for network bundles (cable services) should be greater and more elastic the more networks in the bundle. The results provide broad support for the theory: carriage of almost all of the top-15 cable networks both increase and atten the cable demand curve. In a simple approximation to cable television markets, the results suggest bundling the average number of top-15 cable networks o ered on Basic service increases pro ts relative to unbundled (component) sales, but decreases consumers surplus by an amount equal to a 4.2% increase in the price of cable. On balance, total surplus increases. This suggests seriously considering the welfare consequences of product choice when designing competition and/or regulation policy. (JEL L12, M31, L96, L40, L50, C31). I would like to thank Cathleen McHugh for her assistance inputting the data. I would also like to thank Joe Harrington, Steve Coate, Roger Noll, Bruce Owen, V. Kerry Smith, Mark Coppejans, Frank Wolak, Phillip Leslie, and seminar participants at Cornell University and the 1999 IDEI/NBER Econometrics of Price and Product Competition conference for helpful comments. Correspondance may be sent to Gregory S. Crawford, Department of Economics, Duke University, Durham, NC 27708-0097, phone 919-660-1828, email gsc@econ.duke.edu.