Vertical integration and consumer welfare in the cable industry

Abstract

Two economic theories compete with respect to the impact and effect of vertical integration in the cable industry. One theory of efficiency suggests that vertical integration has resulted in better performance or economic value in terms of the cable subscription fee and the accompanying diversity. Contrarily, the theory of market power argues that vertical integration has led to diseconomies and inefficiencies for cable firms and reduced program diversity. The present study tested the two competing theories by comparing the consumer welfare of integrated multiple system operators (MSOs) with that of nonintegrated MSOs in two dimensions: subscription fees and program diversity. It was discovered that in general the consumer enjoys greater diversity and lower prices from integrated MSOs, but these effects were confounded by differences in system size between the two groups. This study confirms neither the efficiency theory nor the market power theory. Rather, we suggest a diminishing effects model in which consumer welfare is enhanced as vertical integration increases up to an optimal threshold, after which consumer welfare declines.