Market Power and Price Increases for Basic Cable Service since Deregulation

Abstract

Since the deregulation of rates for basic cable television service, increases in price have outpaced the rate of inflation. This article examines whether or not cable systems' increased market power, or their increased exercise of market power, explains these price increases. An estimated "quasi-supply" function for cable systems before and after deregulation implies that real basic cable prices increased 18% since deregulation, holding quality and other costs constant, accounting for 43% of the total real price increase. A demand equation is also estimated, and the estimated demand elasticity of basic cable does not change after deregulation, implying that this 18% real price increase is due to greater exercise of existing market power, made possible by the elimination of price regulation, rather to an increase in market power caused by a change in the demand elasticity for cable.