Effects of Mergers and Competition on Consumer Benefits in the Multi-Channel Video Programming Industry in Korea

Abstract

This article examines the welfare benefits of cable television (CATV) merger and acquisitions in the multi-channel video programming distribution (MVPD) market. In particular, it seeks to answer whether cable subscribers are better off in competitive markets than in concentrated markets. This article estimates the impact of mergers by examining Korea's regional market-share data for MVPD operators with a hierarchical-choice model. First, the estimation results show that the consumer value of the CATV platform, in terms of the category values in a nested logit model, was significantly lower in the concentrated markets than in the more competitive markets. Second, the study compares these findings with those in the literature about the U.S. market. The following question is prompted: Why is direct broadcast satellite competitive with CATV in the United States but not in Korea? This article points out that differences in regulatory policies, particularly as they relate to the treatment of vertically integrated networks, do have significant effects on the effective boundary of MVPD competition across platforms. To support this argument, this article provides details on the policies and market characteristics of the Korean MVPD industry.

Notes

¹147 U.S. C. Section 522(13).

²According to the Cable Act, multi-channel video programming distributions include cable, multi-channel multipoint distribution service, direct broadcast satellite, and a telephone company that provides video services.

³Note that today satellite services retransmit local broadcast stations, whereas they did not do so during the earlier era that Hausman (1999) studied.

⁴Because 10 or 20 relay operators are integrated and function as one cable franchise in many local markets, relay operator–system operator conflict significantly decreased.

⁵Section 19 of the Cable TV Consumer Protection and Competition Act creates a new section 628 of the Communication Act of 1934, which embodies the program access provisions of Section 19.

⁶The omission of franchise-specific covariates may still be subject to some bias in cases where market structure is correlated with demographic variables. We thank an anonymous referee for this viewpoint. Due to the lack of franchise-specific data, we could not fully control such possible bias.

⁷Because the over-the-air option has a single package, it is excluded in the lower-level choice model.

⁸KRW (Korean Won) is the Korean currency unit. As of January 2008, 1 U.S. dollar amounts to about 960 KRW. The reason we do not use the log scale for the price variable is to compute the category values of the over-the-air option, which is free of charge.

⁹From Equation A1, note that any demographic attribute, such as the level of income and education, is dropped out of the equation by differencing from a base package in the model.

¹⁰Despite the difference-in-difference strategy we adopted, we also acknowledge that it is still possible that excluded covariates that differ among markets could make some bias if those variables influence how markets respond to changes in competition structure. We thank anonymous referees for this valuable suggestion.