Vertical Integration, Market Foreclosure, and Consumer Welfare in the Cable Television Industry

by on October 26, 2016 at 2:37 am in Economics, Film, Law, Television | Permalink

That is the title of a 2001 AER piece by Tasneem Chipty, here is the abstract:

I examine the effects of vertical integration between programming and distribution in the cable television industry. I assess the effects of ownership structure on program offerings, prices, and subscriptions, and I compare consumer welfare across integrated and unintegrated markets. The results of this analysis suggest two general conclusions. First, integrated operators tend to exclude rival program services, suggesting that certain program services cannot gain access to the distribution networks of vertically integrated cable system operators. Second, vertical integration does not harm, and may actually benefit, consumers because of the associated efficiency gains.

Out of date, yes, but still evidence that the proposed AT&T and Time-Warner merger is unlikely to damage the interests of consumers.  When there is some market power at each step along the supply chain, vertical integration typically lowers margins and prices, thereby increasing consumer surplus.

For the pointer I thank John Chilton, who also points us to this review chapter by Paul Joskow.  Here is a good James B. Stewart (NYT) piece on how antitrust thinking is moving backward these days, away from science more toward mood affiliation.

1 Steve Sailer October 26, 2016 at 2:45 am

Do vertical mergers in the media ever turn out to be highly profitable?

2 Doug October 26, 2016 at 3:17 am

Does Facebook-Instagram-count?

3 Lord Action October 26, 2016 at 9:28 am

Google-YouTube?

4 Brett October 26, 2016 at 3:24 pm

A definite “no” on that latter one. Even in good years, Youtube barely makes more than break-even, and it has never been highly profitable for Google.

5 Lord Action October 26, 2016 at 3:28 pm

Fair point. I want to say the jury’s still out, but it’s been a long time.

6 JC October 26, 2016 at 3:07 am

Consumers will probably benefit from such moves, companies will probably struggle but they do not have better options vertical integration is the best way to survive in that business.

7 mulp October 26, 2016 at 9:56 pm

Yep, when customers have their programming content restricted, “integrated operators tend to exclude rival program services,” they will not become overloaded with too much content, and thus are more likely to get a life.

Where you find housing will determine the programming you consume. There will eventually be the big sort between consumers of DC and the consumers of Marvel.

8 Damager October 26, 2016 at 5:07 am

This paper says the opposite that ‘ that vertical integration and the elimination of source diversity (competition from independent producers) has had a negative impact on product quality and diversity.’

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2102801

9 Eric October 26, 2016 at 5:56 am

yeah, but on the other hand, that paper is by two lawyers with virtually zero actual quantitative evidence.

10 Eric October 26, 2016 at 5:57 am

much more recent work on the same topic by Crawford, Lee, Whinston, and Yurukoglu finds similar effects.

11 Jon October 26, 2016 at 6:10 am

It would be useful if someone can summarize what the metric and approach to measuring consumer welfare is and what the most critical assumptions are to the determination.

Furthermore, many markets don’t have competition due to local laws. Does the author consider this?

12 rayward October 26, 2016 at 6:52 am

Just as there’s irony in a political movement dedicated to individual freedom supporting a strongman for president, there’s irony in an economic movement dedicated to markets supporting consolidation and elimination of competition. As to the former, Ross Douthat claims it’s the result of the failings of the conservative elite. http://www.nytimes.com/2016/10/26/opinion/campaign-stops/what-the-rights-intellectuals-did-wrong.html?ref=opinion&_r=0 It doesn’t occur to Douthat that the intellectual foundation of the movement may be flawed. I suspect that the economic movement suffers from a similar dysfunction, its intellectual foundation so easily ignored when the interests of the powerful are at stake. Rationalizations are the life’s blood of the ideologue.

13 MOFO October 26, 2016 at 9:54 am

So economic freedom doesnt apply to mergers? Do you think freedom means the freedom for people to do only things you approve of?

14 anon October 26, 2016 at 10:10 am

If you frame it that way, a King should be free to hand down power.

15 Dan in Euroland October 26, 2016 at 10:16 am

rayward,

Your comment seems to be implying that the merger will hurt consumers. What evidence do you actually have? TC is citing actual arguments that the merger may in fact benefit consumers.

It takes actual evidence and logic to refute an argument. Your claims of superior knowledge with no evidence, your mysticism, is cute but unconvincing.

16 anon October 26, 2016 at 10:20 am

I think he just wanted to work in the really pretty good Douthat piece, which says in part:

“The second failure was a failure of recognition and self-critique, in which the right’s best minds deceived themselves about (or made excuses for) the toxic tendencies of populism, which were manifest in various hysterias long before Sean Hannity swooned for Donald Trump. What the intellectuals did not see clearly enough was that Fox News and talk radio and the internet had made right-wing populism more powerful, relative to conservatism’s small elite, than it had been during the Nixon or Reagan eras, without necessarily making it more serious or sober than its Bircher-era antecedents.”

That “without necessarily making it more serious or sober” is pretty droll.

17 Cliff October 26, 2016 at 10:23 am

So he wanted to go completely off topic and troll everyone, great

18 Bill October 26, 2016 at 7:23 am

Competitive impact statements (basically, an exposition of why a consent decree is appropriate to remedy conduct identified in a complaint, along with the complaint itself) are useful in understanding the issues raised in a similar merger.

Here is the link to the CIS for the Comcast/NBC Universal merger for you to assess the issues raised by this merger so you can get a better understanding of the issues raised by the ATT transaction: https://www.justice.gov/atr/case-document/competitive-impact-statement-72

19 John B. Chilton October 26, 2016 at 10:29 am

Bill, thank you for that link.

This, I believe, is the modified final judgment for that case: https://www.justice.gov/file/492176/download

20 anon October 26, 2016 at 10:18 am

Interesting tie-in at the “Stewart (NYT) piece” that Wu coined Net Neutrality and describes this “younger generation” who oppose concentrations of power. I also saw Andrew McAfee tweeting this morning about the long term decline of American start-up culture:

https://twitter.com/amcafee/status/790992079719657472

Do these relate? Would concentrations of power clamp down on business opportunities? Who are we going to believe, academic measures of market power, or our lyin’ eyes?

21 anon October 26, 2016 at 1:38 pm

I should pad out this thought a little more. What I’m thinking is that once a large corporation fills a spot in the economy, that slot ceases to be dynamically competitive. Once there are a few cheap burger chains, or a dominant operating system, no one can compete directly with those things, especially a start up. So they must all look for niches which are not exactly the things corporations are doing. Yogurt was in such a niche until Greek.

But perhaps those gaps are becoming increasingly rare and fairly efficient corporations deliver the same old things we want in a way that allows little entry for competition.

How many cheap burger chains (not smaller premium niches) are there? And 30 years ago? I think it’s about the same. Same also for Microsoft-Macintosh and now IOS-Android.

It might be audacious to start right now on a brand new start-up phone OS, but probably ill-advised.

22 anon October 26, 2016 at 1:53 pm

I should say Yogurt was in such a stability trap until Greek.

Another example, colas. Sure there are premium entrants but can anyone imagine Coke or Pepsi being displaced from the “always two” dynamic in our lifetimes?

23 Shane M October 26, 2016 at 6:42 pm

If you define the market narrowly as colas, perhaps KO and PEP will always be there, but defined more broadly as “drinks” people spend much more on items like water or coffee. When I was younger I couldn’t have imagined selling a bottle of water, much less a bottle of water priced the same as a Coke of Pepsi. Similar for coffee. Monster Energy Drink sortof came out of nowhere also.

I think the central idea here is that the environment has to change somewhat to allow a new competitor to arise. Without the internet Walmart probably still dominates without question, now it’s in a battle with online retail and Amazon. What could make Coke or Pepsi vulnerable? Perhaps a change in distribution. The Sodastream thing might’ve been a try at that. Instead of going to store to buy your 2-liter of coke, you make it from syrup at home yourself, upending the distribution system of hauling liquid around the country in favor of something assembled at home with water and syrup, with each home having it’s own fountain dispenser.

fwiw, if I could get a flavored drink like coke by dropping a tablet in a cup of water, I’d probably prefer that to bringing home 2-liters. But the key point is the opportunity is not provided by providing a better cola, the opportunity is in changing the distribution system itself.

24 Luis Pedro Coelho October 26, 2016 at 5:01 pm

If AT&T and Time-Warner merging is bad because AT&T will privilege its own shows, shouldn’t the same logic apply to Netflix making shows nowadays. They certainly favor their own shows in the visual display. Why doesn’t anti-trust logic apply there?

Now, off to watch the 3rd season of Black Mirror before the Justice Department shuts it down.

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