Why can’t you choose your cable channels?

by on April 7, 2004 at 7:43 am in Economics, Television | Permalink

I don’t ever watch Bravo but still I must pay for it:

In the dream world of some television viewers, they would pay their cable or satellite companies only for the channels they want. Some might not pay for MTV, because they don’t want their 8-year-olds watching it. Others would turn down ESPN Classic, because they’ve already seen the 1975 World Series. Others would eschew TeleFutura, because they don’t speak Spanish.

Reality is far different.

No U.S. cable or satellite company offers what are called “a la carte” plans. In order to get the Discovery Channel from Comcast Corp. cable company, for instance, Washington viewers have to pay for an “expanded basic” package that includes MTV, FX, MSNBC and 33 other channels.

Here is one relevant article.

Why are consumers forced to buy a bundle? Cable companies claim that choice would require expensive boxes, but few observers believe this claim.

More plausibly, price discrimination is at work. Consider a simple example with two individuals. John values Disney at $100 a year and FoxNews at $10 a year; Sally has the reverse valuations. Without bundling, the cable company will offer each channel for about $99, and sell a channel to each consumer, reaping $198 in revenue (N.B.: I am assuming that the cable company has a good idea of demand in general, although it cannot identify which consumer is willing to pay how much for what.)

In lieu of this set up, sell the bundle for $109 to each consumer, reaping a greater revenue of $218. The company makes greater profit.

More importantly, aggregate welfare is higher. In this case each consumer receives two channels instead of one.

Monopolies, regulated or otherwise, tend to bundle commodities when demands are scattered and the marginal cost of additional service is low. In this context, once the program is made, you can sell it cheaply to additional customers. So why not try to get the entire package into everyone’s hands?

You can spin your own numbers, with varying results, but the overall lesson is clear. While there is a general problem with monopoly in the cable market, bundling can make that problem better rather than worse. So don’t complain next time you have to “click-remote” through those Farsi and exercise channels.

Thanks to Curtis Melvin and Robert Saunders and James for relevant pointers. The ever-excellent Arnold Kling offers useful remarks on bundling as well.

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