A Critique of Tabarrok on Bundling

by on May 19, 2014 at 7:17 am in Economics, Television | Permalink

In my MRUniversity video on the economics of bundling I argue that bundling raises total surplus and that requiring the Cable TV companies to price by the channel is unlikely to reduce most people’s cable bill (see also Does Cable TV Ripoff People Who Don’t Like Sports?). Pragmatarianism offers an excellent critique. Here is one bit from a longer post worth reading in full:

The flaw in Tabarrok’s logic is that it completely ignores the necessity of determining what the actual demand is for the individual components in the bundle.  For example, when I subscribed to cable…Charter had no idea how much I valued the Discovery Channel.  Neither did the Discovery Channel.  But is my valuation relevant?  According to Tabarrok…it really isn’t.  Uh, what? 

How could the Discovery Channel and Charter and Tabarrok not care what the actual demand is for the Discovery Channel?  In the absence of consumer valuation…how could society’s limited resources be put to their most valuable uses? 

Tabarrok is basically arguing that we don’t need accurate information in order to efficiently allocate resources.  Except, does he really believe that?  Let me consult my magic database…

The most valuable public goods are constantly changing, just as the most valuable private goods are constantly changing.  The signal provided by prices and mobility is therefore of great importance. – Alexander Tabarrok, in The Voluntary City

Huh.  Hmmm.  Is the Discovery Channel a private good?  Yes.  Is its value constantly changing?  Yes.  So…according to Tabarrok…it’s of great importance that the Discovery Channel should have its own price.  But this sure wasn’t what he said in his video. 

An excellent point that was made most forcefully by Ronald Coase in The Marginal Cost Controversy. Coase argued that pricing goods with high fixed cost at marginal cost would generate static efficiency but at the price of dynamic efficiency because we would not be able to say with assurance that the total value of the product exceeded total cost. Similarly we lose some information with bundling, perhaps especially so because marginal cost in this case is zero. With bundling, we know that the total value of the bundle exceeds the total cost but we are less certain that the total value of each bundle component (channel) exceeds the total cost of each component.

But this cannot be the whole story because in another paper, The Nature of the Firm, Coase pointed out that sometimes we choose not to use prices. Firms, for example, are islands of central planning in a market ocean (see Yglesias for a good discussion).

A channel such as HBO is itself a bundle of dramas, comedies and documentaries. Should Girls and Game of Thrones always be priced and sold separately and not through the HBO bundle? HBO certainly learns something from individually priced downloads on iTunes and that information helps HBO to improve its service. But how much is this information worth?

In 2002 should HBO have individually priced episodes of the Sopranos and sold them through AOL?  Individual pricing generates value but it also has costs. Tradeoffs are everywhere. And, to the crux of the issue, if a law had been passed in 2002 requiring HBO to sell The Sopranos on an episode by episode basis would that have resulted in better and more programming at lower prices? I think not. Similarly, I see few reasons to think that welfare would be improved by a law requiring cable TV companies to price by channel.

More generally, the price system is embedded in the larger field of the market economy which includes non-price institutions such as firms; and the market economy is embedded in the larger field of civil society which includes non-profits and non-market institutions such as the family. Economists often focus on the virtues of the price system but that should not blind us to the many virtues and many margins on which a free society operates.

andrew' May 19, 2014 at 7:24 am

To me, it seems people are whining that a now imaginable technology does not yet exist in rollout. I do this all the time. Just not during election time.

NL7 May 19, 2014 at 7:40 am

One could also unbundle a product linearly. Should people pay for 24 hours a day of a channel when they primarily watch it less than 24 hours a month or only during a few small windows of time in a day? Might as well argue that a channel at primetime, midday, morning, and night could be unbundled. Or that people could purchase a limited number of hours of a channel.

tt May 19, 2014 at 12:13 pm

you know that is happening right ?
or was that your point?

Z May 19, 2014 at 7:45 am

Bundling is itself a service. HBO produces a bunch of content and then bundles it together with selected content from others to create a 24×7 channel. The choices HBO makes in content distinguishes it from ESPN. Therefore, pricing each show on HBO would strip out the added value that comes from bundling like on-demand and getting the shows when released, instead of through rentals after the fact.

This falls apart when we scale up to bundled cable. There’s no added value to having both ESPN and Fox News. They serve different audiences and operate independently. The result is price signals that are wildly out of phase with consumer demand. ESPN would not have billions to spend on live events if not for their right to tax 100 million homes for a service those people don’t use. MSNBC would not exist if not for bundling.

Of course, the simple test of Alex’s argument is to offer both. If bundling is the value he suggests, customers will happily stick with their bundled service. I think we all know that most people would drop vast chunks of their cable selection, now having a clear way to value each and buy only that which they want to consume. Put another way, the cable monopolies and content providers are not fighting this because it will make them rich. That’s a signal we have right now with no need to conjure the shade of Ronald Coase, peace be upon him.

Mike May 19, 2014 at 7:59 am

I’m not so sure you understand how viewers watch TV; they sometimes actually change the channel. For example, I watch both sports and the news. If forced to pay for unbundled channels, I could come up with a long list of channels I wouldn’t want to keep, but I would be shocked if my monthly bill went down. If not for the subsidy of people like me who pay for cable largely to watch sports and action shows/movies in HD, many of the other channels wouldn’t exist at any price, so you may find that your bill does go down.

John Thacker May 19, 2014 at 8:05 am

And yet, does it not seem that people prefer a subscription to Netflix to buying individual shows through iTunes? Netflix itself is a bundle.

There’s no added value to having both ESPN and Fox News.

Is there added value to having both Game of Thrones and similar HBO produced TV shows *and* a bunch of movies already released in the theaters previously? HBO produces a lot of content, yes, but they also show a lot of movies, which they pay for. Surely there’s at least as good a case to demand that HBO have an offering of just their produced TV shows, without all those movies that they pay other content owners for, as it is for someone to demand sports but no news, or vice versa. The movies on HBO serve a different audience than their produced TV shows, but most of the broadcast time is the movies.

I think we all know that most people would drop vast chunks of their cable selection, now having a clear way to value each and buy only that which they want to consume.

Sure, they would. However, what we do not know at all is that they would actually pay less for their smaller cable selection.

Very few people I know celebrated when Warner Brothers movies were removed from the Netflix bundle. “Yay, now I can decide for myself if I wish to purchase them a la carte by going to Warner Brothers’ new own private streaming site,” I do not recall people saying.

Andrew M May 19, 2014 at 8:24 am

Netflix vs iTunes comes down to cost. Buying three iTunes episodes of a moderately popular TV show costs more than a month’s Netflix subscription.

bluto May 19, 2014 at 12:22 pm

Why would you expect unbundled channels to operate any differently? 3-5 channels will likely cost more than a current bundled subscription, too.

Z May 19, 2014 at 9:18 am

I don’t see the value in shifting the focus from cable bundling to some other service that may or may not be analogous. What we know is roughly 80% of cable homes pay for ESPN despite never watching it. This arrangement would never be tolerated in other areas of life. The newspaper business, for example, has been gutted by technology separating out the services.

The argument you make about the cable bill assumes nothing changes when things change. I’ll use myself as an example. I watch sports and nothing else. If ESPN was a $20 service, I’d pay it. If it was priced at $200, I would not pay it. ESPN would have to respond to these new realities and change their business model accordingly. The same is true of HBO. Maybe they abandon the movies part of their business and become an Internet service selling shows.

We can’t know any of this without a market. Right now, state sanctioned last mile utilities are closing off these options. Maybe we find out that Americans are not as crazy for TV sports as we’re told. Once those fans get the proper bill for their hobby, they may make different choices. Maybe cable news will have to change their programming once large chunks of their subscriber base has the option to drop the channel.

Eric with a c May 19, 2014 at 1:34 pm

I question your numbers and ask for a citation. 13m people watched the most popular Monday Night Football game this past year. I believe the US pay tv market is about 100m. I find it unlikely (but possible) that 2/3 of all ESPN viewers watched that particular game. Football is the largest sport, especially on TV, but there’s still lots of basketball and baseball only fans, or people who don’t care for those particular teams. Nielsen also reports that this year’s draft coverage reached 44m people across ESPN and NFL, although the article I saw was unclear if they were counting web hits and I’m not sure if they were not double counting people.

In addition, unbundling stuff, even if paying per hour was impractical, would cause a lot of people to vary their package seasonally and decrease their total utility. For example I would only subscribe to AMC while The Walking Dead is on. I would lose the utility of random episodes of midsummer walking dead marathons, and AMC would lose the ability to sell me ads during that marathon, on a service that costs them 0$ on the margin to provide.

AlanH May 19, 2014 at 11:13 pm

It seems to me the legitimate benefit of unbundling down to the network/channel level derives from the fact that we think the channel management is doing a good job and providing something we want. The cable operator has no control over the channel’s management and budgetting, so sending them a bundle-package signal does little good.

Those who argue “well, if you unbundle, why not go all the way down to the show producer’s?” The answer is that they cannot change production fast enough to respond to the price signal. The channel can.

The argument that a selection will end up costing more than a bundle ignores reality: No one likes any channel enough to put up with a one-channel price higher than attractive alternatives, and the high-priced channel will, markets say, lead to competitors shaping their product to increase its value, simultaneously undercutting the pricing power of the most expensive channel.

John Thacker May 19, 2014 at 8:14 am

Of course, the simple test of Alex’s argument is to offer both.

It’s already legal to offer both. That’s why HBO itself is offered as an a la carte, as are Showtime and Cinemax. Other channels are free to do so. The Disney Channel used to be an a la carte channel, but moved away from that, preferring being part of a bundle (around 1990 or so.)

Forcing the channels to be offered a la carte would not reduce any monopoly power of the cable companies, nor the content providers. They will continue to charge a profit maximizing price. If you were willing to pay $X for 120 channels, 15 of which you actually watch, they will find a way to charge you $X for the 15 channels you watch, if they have monopoly power.

John Thacker May 19, 2014 at 8:19 am

Many cable networks offer individual a la carte channels aimed at immigrants or other foreign language speakers. They are very niche, and tend to be of the range of $5-10/month for a single foreign language channel.

NFL RedZone is also available a la carte, and is far from cheap, as are other single-sport dedicated packages.

Cable systems and networks also offer video on demand services, which can be fairly expensive per show, but can be obtained even with a very basic cable subscription.

The bottom line is that plenty of a la carte channels already exist, and without exception they’re fairly expensive, because if it’s going to be one of your 15 channels, you’re willing to pay $10/month. That’s even for ones that carry ads. No reason to think that it would be any different.

Tom West May 19, 2014 at 10:07 am

Indeed, if forced to go ala carte, I suspect that that the cable companies will set the break-even point for most people will be about 5 channels.

On the other hand, people might be happier only getting 5 channels and paying the same amount. At least their money isn’t being “wasted” :-).

parley May 19, 2014 at 10:33 am

Cable companies already know what their customers actually watch, in great detail.

Modern cable TV set-top boxes & DVR’s from these companies are 2-Way communication devices. They transmit exactly which channel you are watching and time duration. Most customers use this company-provided hardware.

So the Cable TV companies have very good aggregate data on their customers viewing habits and choices. They have current market data on individual channels.

Dan Weber May 19, 2014 at 10:01 am

If ESPN and Fox News really are completely independent, that is the perfect reason for the supplier to bundle them.

If 20% of your subscribers speak Spanish, but not French, and another 20% of your subscribers speak French, but not Spanish, it’s stupid to make a “Spanish package” for $20 and a “French package” for $20. You make a “Foreign Language package,” put all the Spanish and French channels in it, and charge $20 for it.

Z May 19, 2014 at 10:08 am

This is incorrect. Bundling implies the resulting product is greater than the sum of its parts. If the car wash offers a wash and wax package that is a little cheaper than the cost of each, that’s a value to the customer, if the customer wants the wax and you can buy each service separately.

The current model from The People’s Cable Monopoly is I pay for a bunch of stuff I don’t want to keep my comrades in Hollywood busy. No thanks.

Dan Weber May 19, 2014 at 10:14 am

Please specify that you think is incorrect about this example:

The French package is $20.

The Spanish package is $20.

The Foreign Language package is $20.

How are people who get the Foreign Language bundle, despite speaking only one of Spanish or French, worse off? Don’t beg the question by saying “they are paying for channels they don’t want.” They are paying the same for both languages as they would for just one.

Z May 19, 2014 at 10:21 am

What advantage is there to offer people channels in a language they don’t speak? You’re assuming some great savings that does not exist. But let’s pretend it does exist. That makes the case for unbundling cable. The supplier therefore has an incentive to find these savings to increase their value proposition. Currently, no incentive exists.

Dan Weber May 19, 2014 at 10:40 am

What advantage is there to offer people channels in a language they don’t speak?

I know you are really trying hard to not address my example. I will now address this second attempt to distract from it, but, then, please address how the consumer is worse off paying $20 for both languages versus $20 for one language.

The advantage to the cable company is that they don’t have to maintain two separate product lines, and the customer doesn’t have to expend any time on decision costs. [Again, a key point here is the fact that the Spanish-and-French package is no worse for the consumer. This is the point on which you refuse to engage.] Especially in America, the vast majority of customers don’t care at all about the foreign language packages. For those who do, there is one single option that covers them all.

Once the decision is made to offer French and Spanish channels to the customer base, the channels are then completely non-rivalrous. If many consumers really did want both Spanish and French and were willing to pay for both, then if would make sense for the supplier to make them excludable.

Say you segment your market into Sports Fans, who have $30, $50, $80, and $150 packages. Then you have your Movie Fans, who have $30, $50, and $80 packages. You have your Sci-Fi Fans, who have $30 and $50 packages. You have your Kids TV fans, who gets a $50 and $80 package.

Assuming no overlap between groups, offering 11 packages benefits absolutely no one — not the producers, not the consumer. Instead, you offer 4 packages, at $30, $50, $80, and $150. The producer only has a few options to offer and maintain, the consumer doesn’t have to dig through a bunch of options that are no better for him, and the consumer maintains option choice — if the Movie Fan visits his Sports Fan friend who has the biggest package, he has everything his friend wants.

Z May 19, 2014 at 12:20 pm

Dan, I don’t dispute that Value Meals at McDonalds are good for the consumer. What drives that is competition, not the benevolence of Ronald McDonald. The cable monopoly has no incentive to save me money as the consumer. Sure, it is better for them to offer three packages. It would be better for them if they were allowed to rob houses during the day too. That’s not what we are discussing so your example is not germane. It falls apart when looking for points of comparison between it and reality.

A better example is imagine if McDonald’s is the only fast food joint in American and they only offered Value Meals. Imagine further that no one is allowed to open a competing restaurant and McDonald’s has exclusive rights to hamburger, cheese and potatoes. No one other than a communist would argue in favor of such a scheme. Why should we tolerate it with cable?

Let’s throw open the windows as best we can. Let HBO sell their service as a stand alone product. Let Comcast offer a la carte pricing in addition to Value meal bundles. Let’s see Fox and CNN compete for subscribers.

bluto May 19, 2014 at 12:24 pm

Value meals are all about selling the high margin soda and fries to as many low margin hamburger buyers as possible.

AlanH May 19, 2014 at 11:20 pm

A price of $20 for the Spanish channel alone implies a greater profit to the channel’s management, and the Spanish speaker would rather enable higher production values only in the Spanish channel.

If, in any reality, the cable provider could offer the three prices, 20, 20, and 20, that Dan hypothesizes, then he is assuming that the cable operator’s cost to the channel does not rise when his one-channel price rises. That isn’t how the industry functions, or how competition between cable and internet provider competition works.

Rob42 May 19, 2014 at 11:49 am

People forget that this foreign language bundle is great deal for people who speak BOTH French and Spanish. If there were a subset of French speakers who also speak Spanish, imagine that they are willing to spend $20 for the French channel and $5 for the additional Spanish channel. But, the cable company can’t sell the Spanish channel at $5 without selling it for $5 to all the native SPanish speakers who are willing to pay $20. So, in a la carte world, the bilinguals only get the French channel. But, if the cable company bundles, then the cable company has created $5 of consumer surplus without losing any of its profits.

In this example bundling as better for consumers, and this is more descriptive of the real world. We don’t have people who only watch sports or only watch Discovery, rather, we have a guy who mostly watches sports, but will watch Discovery when his neice is visiting, and we have another guy who mostly watchs Discovery, but occasionally likes to watch a game. These occasional/low utility viewers get priced out in an a la carte model because it is really hard to price discriminate here, but they get a lot of extra surplus by the bundling.

Frederic Mari May 20, 2014 at 7:13 am

That’s true but it’s again arguing about what the prices who would like in an unbundled world.

Say, I get 200 channels right now and, unbundled, only 15 – but it’s all the same price. You cannot shake the idea that there’s something dodgy going on here. And, in that 15 channels, in reality, there will be about 10 channels I watch only occasionally. Or when the niece is visiting… There’s just not that much time in the day…

Don’t you guys have “themed” bundles? One is heavy on sport, the other heavier on foreign cinema and another yet more focused on children? I haven’t had a TV in a decade but, last I checked, that was how it was done in France… You were still getting a random smattering of channels that didn’t interest you much (but could occasionally be useful) while concentrating on your core interest(s).

Mark May 19, 2014 at 8:18 am

This may be tangential to the current discussion but humorous so I included it as a diversion for the reader:

http://theoatmeal.com/comics/game_of_thrones

Dan Weber May 19, 2014 at 9:50 am

What would The Oatmeal do if I were to repost a bunch of his stuff after stripping out his ways of monetizing the product?

(Spoiler: this already happened, and he wrote a bunch of nastygrams to FunnyJunk for doing this. They responded with a stupid lawsuit, and he responded with a charity fundraiser, and then FunnyJunk’s lawyer went berserk. It’s a fun story, but don’t forget that at the start The Oatmeal was pissed about other people taking his stuff and removing his monetization channel.)

louis May 19, 2014 at 8:21 am

Are cable providers not able to observe viewers’ consumption patterns?
If a city runs several public parks, and for budgetary reasons is forced to close one of them, you would expect a study of which park is least utilized before the decision is made. There are lots of things one could consume at zero marginal dollar cost, but we still make choices over how to spend our finite time every day. In many cases that choice is observable.

Edgar May 19, 2014 at 9:04 am

Good point. Pragmentarianism writes “If consumers aren’t given the opportunity to opt out of individual channels…then how can we possibly know what the actual demand is for the Discovery Channel?” Ummm,.. isn’t there a whole industry devoted to answering this: http://tvbythenumbers.zap2it.com/category/overnight-tv-ratings/tv-ratings-nielsen-overnight-cable-tv-show-ratings/ not to mention the cable providers own data.

Dan Weber May 19, 2014 at 9:54 am

I imagine Pragmatist sitting there in his fedora and goth wear talking about how unique and special he is, when of course he’s put right into a demographic bucket that captured his marginal value with surprising accuracy.

Cable companies do a lot of research to figure out how much they can charge people. It’s practically their entire business.

I’m reminded of the people who, every single election cycle, declare that the pollsters are discriminating against their favored candidate, because [insert stupid reason]. The pollsters are professionally paid by people who care a lot about their results, and getting this right is really their entire job. They can and do make mistakes, but they at least have a feedback mechanism in place, unlike the guy pounding wildly on his keyboard.

Z May 19, 2014 at 10:27 am

Again, all of the arguments in favor of granting Comcast an unlimited monopoly can be tested by unbundling the service. If the models are correct, nothing changes.

Dan Weber May 19, 2014 at 10:44 am

It has been illegal for localities to negotiate cable monopolies since 1992. Most deals that did grant monopolies were renewing on 10- or 15-year contracts. Meaning if you find a legal cable monopoly in the US today, you should call the Smithsonian.

Z May 19, 2014 at 12:22 pm

You must not live in America. Where I live we have exactly one cable company. I’ve lived in a dozen states over the last two decades and never once had more than one cable company.

Daniel Barkalow May 19, 2014 at 12:31 pm

It’s pretty much impossible to find a legally-enforced cable monopoly, but not at all hard to find a natural monopoly on cable service, in that building the necessary infrastructure in a locality that already has an established business is not going to be cost effective. (That is, if you put in the cables, and get some plausible fraction of the market, and charge what people are paying, you won’t make back your investment in a reasonable time frame.) There are some places where there is duplicate infrastructure and competition, but most places have effective monopolies. (Of course, the local monopoly found it cost-effective to build the infrastructure before 1992, based on getting the whole market and no competition on price, and has now recouped the investment.)

Dan Weber May 19, 2014 at 1:00 pm

In my weekly junk mail I always have multiple parties trying to sell me TV.

I live in the US, and not even in a top-5 metro area. (Around the bottom of top-20.)

Chris S May 19, 2014 at 1:00 pm

Are you counting only cable companies as competition?

Where I live, I can get Comcast, Charter, Dish, Uverse and a variety of unbundled programming on the internet with a Roku and other devices. I don’t really care across what pipe it comes, as long as my kids can watch Caillou, I’m set.

Z May 19, 2014 at 1:47 pm

Looking for the number of single provider households, I stumbled in this: http://www.businessinsider.com/cord-cutters-and-the-death-of-tv-2013-11

Over-the-air broadband most likely solves the problem. You can get decent video over 4G now. Once that’s a realistic option for home use then it probably sorts itself and we get a Chinese menu of services along with a-la-carte pricing. Since I don’t watch TV, it does not effect me, but it would be nice to watch a game PPV.

AlanH May 19, 2014 at 11:25 pm

The natural and increasingly the most common competition is between cable TV-offered channels and internet channel-to-consumer show sales. If the Spanish channel costs $20 and the combo (Spanish and French) costs $20, and the Spanish channel is not getting a higher price for the Spanish-alone subscription, he’ll take the best shows to direct internet sales and tell the French-is-equal cable provider to go hang. That is increasingly happening. When channel production values and consumer valuation change, the price changes…one way or another. That’s markets.

The Engineer May 19, 2014 at 8:25 am

Take it one step further. I watched The Sopranos on DVD. Should I have been forced to buy it episode by episode? The DVD was a bundle. Perhaps I would go through the DVD and decide that I really didn’t like the show, and not finish it. Information about my demand was lost.

Z May 19, 2014 at 12:23 pm

You could have bought it by the episode. Instead you *chose* to buy a whole season. Why do you want to deny everyone else the same choices you enjoy?

AlanH May 19, 2014 at 11:28 pm

You prove the unbundling concept’s market sense: You didn’t buy the DVD from your cable operator. You bought it from HBO, the group that funded the production and whose taste and production values you are approving by your purchase. Whether HBO offers you one episode or a season has nothing to do with the cable operator unbundling issue. You’re still buying from HBO, not the operator, in either case.

Craig Richardson May 19, 2014 at 8:29 am

There’s an important piece also: the economics of fun. Namely, people often don’t want to be utility maximizers when they are having fun- they want to get into another zone where they are just relaxing and enjoying. Some people might remember Disney world used to have every ride priced individually through tickets- E tickets, D, C and so forth. E was Space Mountain, etc. and you always ran out of those.. But then Disney went to a bundling model where you didn’t have to worry, and used queuing as an alternative form of pricing. Same thing with cruises and all inclusive vacations.

When I’m paying for commodities, let me pay individually- I don’t want gasoline, chips and donuts bundled at the convenience store.
But when I’m having fun, let me get away from thinking about prices every second. This is why so many people find economists to be insufferable on vacations. :)

Dan Weber May 19, 2014 at 10:46 am

Well, I bet some people think it is fun to watch TV with a big scoreboard running over the screen, ticking up a few pennies for each minute they watch. It could be a contest for them!

I think it’s needless to say that those people are the extreme minority.

AlanH May 19, 2014 at 11:32 pm

Why would there be ‘a big scoreboard’? Unbundling generally means a subscription month, and paid until you cancel. I generally watch only the Tennis Channel, HBO, and one of two news channels (Bloomberg and Fox). The rest is, for me, noise. Go to the Guide and you’ll see the big scoreboard, and have to scroll to the few channels you actually watch.

AlanH May 19, 2014 at 11:33 pm

Why would there be ‘a big scoreboard’? Unbundling generally means a subscription monthly, and paid until you cancel. I generally watch only the Tennis Channel, HBO, and one of two news channels (Bloomberg and Fox). The rest is, for me, noise. Go to the Guide and you’ll see the big scoreboard, and have to scroll to the few channels you actually watch.

CMOT May 19, 2014 at 8:29 am

“determining what the actual demand is for the individual components in the bundle”.

This is done via ratings agencies, like Nielsen, whose slogan is “what people watch”. Which some never get mentioned by either Pragmatarianism or Taborrok.

derek May 19, 2014 at 8:58 am

The rating agencies are doing a service for the advertising market. The pricing is set by how effective a show is at delivering an audience to an advertiser. Having the viewer pay changes the pricing dynamics substantially.

Brent May 19, 2014 at 8:48 am

It’s also interesting that the government forces a lot of bundling by banning certain services. In fac5, the government itself is kind of a package deal, albeit one you literally can’t refuse.

Andrew' May 19, 2014 at 9:39 am

This is, in fact, my theory of bad government.

So, maybe I’ll change my mind on cable.

Slocum May 19, 2014 at 12:52 pm

Except, of course, government bundling is much, much worse because you don’t even get to choose your bundle — you’re stuck with whatever the majority prefers and can’t even opt out.

AlanH May 19, 2014 at 11:36 pm

Government is, in fact worse than that. They force me to buy a bundle that doesn’t include the services I want, only the services some other guys want. They’re dropping my favorite services. “Unbundle now! No unbundling, no peace!” Laugh.

derek May 19, 2014 at 8:55 am

The problem isn’t setting the price for Discovery or the Sopranos. People want to watch them. What would be disastrous in that scenario is the clearing price for everything else. 99% of the product offerings would be priced a $0. The cable companies would be stuck as well; they have to justify their large fees and couldn’t if customers were only willing to pay for 1 hour of programming per week.

My tv watching is buying a dvd set of a show that I like and watching it. I realize that if I was what the market looked like, the whole thing would disappear within a week or two.

Z May 19, 2014 at 9:25 am

This is the “why not use spoons?” problem. The only people making it are the folks making profits from it. The content providers love the current arrangement because they get to tax every cable home for a product that most would never buy. The argument from the monopolies is “bundling creates jobs and lowers the cost of the tiny bit of our service you actually want.” That’s as unpersuasive as giving laborers spoons instead of shovels.

Steven Kopits May 19, 2014 at 9:19 am

All the models mentioned exist in reality.

– Cable companies package channels.

– Subscription cable channels bundle programs.

– Movies and fights are also sold on an a la carte, pay-per-view or on-demand basis.

Comcast does, in fact, have a pretty good idea of what the Discovery Channel is worth, because it can determine the number and demographics of viewers, and thus the value of the program compared to other programs. It’s not perfect, but they can probably get the value to +/- 15%, maybe better.

Just because uninformed economists speculate about the value of these things, you shouldn’t assume there aren’t squads of analysts and lawyers working for both the cable and content providers to maximize the revenues of their products and services. There is art in this, but also analysis and established practice.

Andrew' May 19, 2014 at 9:45 am

The question, to me, is are monopolistic companies not unbundling when they could because it gives them economic profits.

Even then, we might be better focusing on the “monopolistic” part.

Dan Weber May 19, 2014 at 9:58 am

Not to mention that it’s inevitable that a more accurate model of exactly how much people value things would lead to the cable companies extracting more money from the viewers.

There is fuzziness right now, but if the $61 bundle is worth $74 to me, that’s $13 of surplus I capture. Once they come up with a better measurement, they can work to capture more of it.

Steven Kopits May 19, 2014 at 10:51 am

Believe me, Dan, they have teams who work on this stuff all the time. It’s a core competence, because it’s one of the few variables management can control.

I think Andrew’ is right. It’s not so much a matter of valuing the bundle as using the advantages of actual or near-monopolies to exact rents from consumers.

Dan Weber May 19, 2014 at 11:05 am

Where does “monopoly” enter into the equation?

Broadcasting signals over a coax cable to a neighborhood is a service with high fixed costs, but negligible marginal costs. Once you are transmitting ESPN to one household, it’s more work to try to make the ESPN signal only go to certain places instead of letting it go everywhere on the coax.

Two cable companies would have the exact same calculus. (You certainly wouldn’t have one cable company that only did news and another that only did movies, because then they couldn’t share their big up-front fixed costs, which is wiring up the neighborhood.) They would both compete by trying to offer better price bundles.

When newspapers were big enough that major cities could have them in competition, there was no effort made to get savings by providing some people with no sports section. The bundles were by day-of-week.

parley May 19, 2014 at 12:53 pm

“…it’s more work to try to make the ESPN signal only go to certain places instead of letting it go everywhere on the coax.”

,

Cable TV pumps ALL the channels, All the time, to ALL subscribers over the coax.

The sorting is now easily done through digital encryption at the receiving end. Everybody gets all the encrypted channels to their home via coax — but your TV can only use/present them if you paid for the specific (by channel) de-encryption codes. Your set-top cable box/DVR quietly and smoothly handles all this technicalstuff.

Also, the monopoly residue still heavily affects cable competition today. The former legal monopolies permitted legacy cable companies to grow massively and establish their very costly infrastructure; newcommer startups today can’t compete against that level of entrenched ex-monopolists economic advantage.

AlanH May 19, 2014 at 11:41 pm

What is this talk of cable companies, plural? That was last year. OK, perhaps there will be at least two such companies next year. But not on your fiber.

The next step has to be to internet direct TV providers, just more and more Netflix clones for sports, films, and good shows.

Michael Cain May 19, 2014 at 10:51 am

Add to that list that channels may come pre-bundled from the content companies. ESPN is not a single channel, there’s a bundle of them (ESPN, ESPN2, ESPNU, etc). The bundle is cheaper to the cable company than purchasing the channels individually, although how much cheaper depends on how many cable subscribers get which subsets of the bundle. The content companies are increasingly willing to make use of that bundling. For example, if the first of two playoff games on ESPN runs long, coverage of the second game may start on ESPN2 or ESPNU (usually bumping pre-recorded content), then be switched to ESPN when the first game ends. Bidding for the Olympics coverage is now limited to companies/consortiums that control at least four channels and have the ability to switch programming between them.

ummm May 19, 2014 at 9:25 am

That’s why the internet is taking over. You can get almost anything TV has to offer but for free, if you don’t mind some lag and annoying ads.

Andrew' May 19, 2014 at 9:42 am

Yeah, but it’s a huge pain in the arse.

To my kid, normal is watching a kid in Europe play a video game on Youtube. To him, weird is trying to find the basketball game.

To me, weird is having to help my kid search Youtube every 7 minutes.

Michael Cain May 19, 2014 at 10:55 am

But you still buy from an intermediary acting as an aggregator (Neflix, Roku). Most of the content producers have exactly zero interest in dealing directly with a billion consumers.

Art Deco May 19, 2014 at 10:25 am

I’d love a-la-carte cable service, even if it had little effect on my bill. The utility of 90% of the channels I receive is, for my household, nil, and we get the baseline service.

derek May 19, 2014 at 10:48 am

This post makes me wonder if Alex was somehow never forced to read Voltaire’s Candide; his position appears to be positively Panglossian. To me, Alex is conflating the widely accepted efficiency of free markets with laissez faire policies that have the effect of permitting actors such as cable companies to disrupt free markets. Just because market is structured a certain way does not mean that it is optimal for consumers or society at-large.

GiT May 19, 2014 at 11:36 pm

Most free marketeers seem to have never read Candide.

Tom DeMeo May 19, 2014 at 10:54 am

Cable companies know, or can know what we watch. They could reimburse content providers based on views of specific programs, and could charge us based on our total usage.

whatsthat May 19, 2014 at 11:15 am

LOL third person reference in title LOL

FE May 19, 2014 at 11:16 am

“More generally, the price system is embedded in the larger field of the market economy which includes non-price institutions such as firms; and the market economy is embedded in the larger field of civil society which includes non-profits and non-market institutions such as the family. Economists often focus on the virtues of the price system but that should not blind us to the many virtues and many margins on which a free society operates.”

Yes, but democratic government is also one of the non-price institutions embedded in the larger field of civil society. On one side of the transaction, we have cable companies who prefer bundling. On the other side, we have a lot of consumers who prefer a la carte. The consumers face a lot of transaction costs in effectively demanding their preference in the market – they would have to organize a nationwide boycott of bundled cable or the like. As an alternative, they could prompt their Congressmen to enact their preferences into law. Congress is acting as buyers’ agent and is part of the larger market mechanism.

AlanH May 19, 2014 at 11:51 pm

Democracy is a non-market institution? Representative democracy? You tell me which congressman you want to buy, or which issue. I’ll help you figure out what it will cost. You buy the pro-banking votes from the left-winger who runs on women’s rights and free weed. You buy the pro-choice votes from the guys who run on jobs and stricter banking rules. In other words you can and must pick your favorites from channels who are assumed (by the uninformed) to be a take-it-or-leave it bundle. Ha. That’s only in the campaign ads. In office they can only sell certain individual issue votes, and definitely only for a certain price.

Families are non-profit? Right up until you offer an employee 150% overtime or promotion points to work late and miss her kid’s soccer game. Family values. Deferred.

Emil May 19, 2014 at 11:21 am

I see that very few (anyone?) got the point about high fixed costs. It is quite obvious that the marginal cost for each additional package is quite low once the frixed cost of the network is paid for…

AlanH May 19, 2014 at 11:54 pm

Just to be clear, did you mean to write “the fixed cost of the cable provider is paid for…”?

This is why cable operators are best treated as utilities, and forced to open access to others in bid-for-bandwidth competitions, with a cap on operator profits.

Sebastian H May 19, 2014 at 12:39 pm

ESPN and the discovery channel.

Individual episodes of a unified TV show.

Individual words in an essay.

These three aren’t equally ‘bundled’. Not all analogies are analogous.

The near monopoly cable companies have in local service areas is an important factor. It isn’t clear to me exactly how that factor cuts in the argument, but ignoring it definitely won’t get you anywhere near the truth.

Bill May 19, 2014 at 7:20 pm

Interesting that no one discussed bundling in the context of a network industry, and that is really the competitive issue that is involved here,

Bundling, outside of the context of a network industry, is simply a price discrimination mechanism leading to more output because it extracts revenue based on a maximum willingness to pay. Ultimately, this leads to greater output.

But, bundling in the context of a network industry can be quite different. In network industries, you have a supplier of content, a cable company, and a consumer. The cable company extracts revenue from the supplier of content (over air TV network, producer, HBO, etc.) and the consumer. In some cases, the cable company is also a producer (e.g., Comcast (NBC , Universal), Time Warner), which in that capacity may have different incentives to carry or bundle differently offerings of its rivals so as to favor its own offerings. Some programs need a minimum amount of national coverage to be picked up in the news and be covered as the program to see,. (Imagine, for example, whether Breaking Bad had been in a super premium package in NYC and whether it would have gotten the traction and coverage that it needed to be recognized nationally.

If you want to read more on this subject, google Economides and bundling. Economides is a pretty good IO economist on bundling in networks.

Shane M May 19, 2014 at 10:55 pm

Bundling is a market response to the consumer behavior of not wanting to feel the pain of purchase and making a decision about every show they wish to watch. I don’t have a link, but there are studies showing large utility declines in scenarios where people have to pay by the piece vs. paying up front for a bundle. It’s the simple act of repeatedly having to make a purchase decision that seems to cause this. There’s something to the idea that we’re not well built to consider and make purchase decisions frequently. Dan Ariely is the author on one of the papers – but can’t find it.

Cuong N May 20, 2014 at 1:53 am

I don’t think that bundling is disappearing anytime soon without a fight. It is a form of price discrimination netting the producers the most surplus and exploiting each consumers willingness to pay. With the sunk costs of providing cable TV already in place, the marginal costs of providing more channels are negligible but can really pad the bottom line for the cable companies. Very similar to the strategy employed by Microsoft Office in my eyes.

louis May 20, 2014 at 10:49 am

To me the strange thing about how cable television is sold is not that channels are bundled, but who gets to do the bundling. Why not declare the last mile of cable to the home a “common carrier” service, and have customers pay some regulated access fee for broadband/TV service. Then have content providers sell their wares directly to the customer, in bundles or not. Perhaps you’ll see more services like HBO on demand in that case, where a subscription fee gives you access to a full library of content. Or Pandora-like micropayment systems.

Steve Roth May 21, 2014 at 7:52 pm

In cable at least (and Netflix), the bundler can see the demand — what people are watching (substituting one channel for another, substitution being the very essence of demand curves).

Asked myself recently why Netlfix is creating its own shows. Because they have to provide content or they lose customers. Is it cheaper to buy/license, or to create that content?

Viewers aren’t voting with their wallets, they’re voting with their time. This is arguably a much more accurate (and granular — show-by-show) measure of demand than pricing individual channels, where viewers have to predict in big overall terms what they’re going to want to watch.

So the “price information channel” is at work here, but designated in minutes not dollars.

DocMerlin May 23, 2014 at 8:54 am

“According to Tabarrok…it really isn’t. Uh, what? How could the Discovery Channel and Charter and Tabarrok not care what the actual demand is for the Discovery Channel?”

– the marginal cost for Discovery Channel delivery is pretty much zero, but the fixed costs are relatively high.

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