Abstract
Using the cable industry as an illustrative case, this article investigates implications of endogenous quality choice when bundling information goods and analyzes welfare effects of an a la carte regulation that forces firms to unbundle products. The analysis shows that a la carte pricing decreases consumer surplus and product quality even when it reduces the average product price. An increase in advertising rates decreases product price, but it also reduces product quality and could make consumers worse off. These findings have important policy implications for media markets where regulators are considering imposition of a la carte pricing.
Notes
Nodir Adilov is an Assistant Professor in the Department of Economics at the Richard T. Doermer School of Business at Indiana University–Purdue University, Fort Wayne, United States.
1See Adams and Yellen (1976); Bakos and Brynjolfsson (1999, 2000); McAfee, McMillan, and Whinston (1989); Salinger (1995); and Schmalensee (1984).
2See Gabel and Kennet (1994) for empirical evidence on economies of scope in the telephone market.
3See Nalebuff (2004).
4A recent empirical study by CitationCrawford (2008) strongly supports the argument that consumer sorting plays an important role for a cable operator's decision to bundle television programs.
5See Consumer Federation of America and Consumers Union (2004).
6See National Cable & Telecommunications Association (2004) and CitationEisenach and Ludwick (2006).
7See, for example, CitationAdams and Yellen (1976), Bakos and Brynjolfsson (1999, 2000), CitationRennhoff and Serfes (2009), CitationSalinger (1995), and CitationSchmalensee (1984) for traditional approaches to model product bundling in media markets.
8Note that the second-order conditions are satisfied because the profit function (π) is strictly concave with respect to price levels: θ2π/θp 2 i = −2/f(ei ) < 0 and θ2π/θpi θpj = 0.
9The second-order conditions are satisfied because θ2π/θe 2 i = f″(ei )/4 < 0 and θ2π/θe 1θej = 0.
10Using the conventional notation, “iff” denotes “if and only if.”
11Note that the second-order condition is satisfied because θ2π/θp 2 B = −6pB /2x 1 x 2 < 0.
12Again, the second-order condition is satisfied because the profit function is concave with respect to pB .
13Note that the firm's revenue function qBpB can be calculated using Equations A7 and A8.
14The second-order conditions are satisfied because the profit function is concave.