On Measuring Competitive Viability and Monopoly Power in Cable: An Empirical Cost Approach

This study provides empirical evidence concerning the economic feasibility of competition in the local market for video-delivery services. Using responses from the FCC's 1995 cost survey, we jointly estimate a translog cost function with factor share equations. To evaluate subadditivity, the fitted total cost of each firm is compared with the cost of two firms providing the same total output in eleven different market scenarios. Although costs were mildly superadditive, in the vast majority of cases they were lower when one firm provided the output. Average cost savings with respect to a monopoly were fairly small, ranging from 1.37 with a 10 market overlap to 5.05 with a complete overbuild. We also calculated marginal cost from the fitted total cost equation, and a price for cable services derived from the FCC survey data. Using these results and Rubinovitz's price elasticity of 1.46, we estimated that reregulation had a regulatory effectiveness of 0.3251 and held prices to 40.5 of the monopoly level.