Measuring consumer switching costs in the television industry

Abstract

In this article, I develop and estimate a model of dynamic consumer behavior with switching costs in the market for paid-television services. I estimate the parameters of the structural model using data on cable and satellite systems across local US television markets over the period 1992-2006. The results suggest switching costs range from $159 to $242 for cable and from $212 to $276 for satellite providers in 1997 dollars. Using a simple dynamic model of cable providers, I demonstrate that switching costs of these magnitudes can significantly affect the firms' optimal strategies. * University of Mannheim; ashcherb@mail.uni-mannheim.de. I am deeply indebted to my supervisors, Gregory Crawford and Gautam Gowrisankaran, for their help at all stages of my work. I greatly acknowledge valuable advice and suggestions made by Daniel Ackerberg, Keisuke Hirano, and Aviv Nevo. Useful comments and suggestions made by Kathleen Nosal, Yuya Takahashi, Tim Lee, Nicolas Schutz, Philipp Schmidt-Dengler, and anonymous referees are greatly appreciated. All errors are my own. 366 C 2016, The RAND Corporation. 1 In 2007, cable operators had revenues of about $79.1 billion nationwide. 2 The methodology can be applied to other industries as well. For example, Nosal (2012) extends the method to estimate consumer switching costs in the health insurance industry. C The RAND Corporation 2016. Television industry: institutional detailsCable television originated in the late 1940s as a means of delivering broadcast signals to areas with poor over-the-air reception. It diffused widely in the 1970s, when television networks began using satellite technology to deliver their content to cable systems. Until the early 1990s, when a Direct Broadcast Satellite (DBS) service was launched, local cable systems were natural monopolies. Since then, the subscriber base of DBS providers has experienced rapid growth. Competition in the television industry between DBS and cable operators is somewhat unusual because cable systems make pricing and quality decisions locally, whereas satellite policies are set at the national level. In 1996, the Telecommunications Act removed price controls on highquality products, leaving only basic service subject to (possibly very weak) regulation. So-called must-carry regulations sometimes require cable systems to provide certain television stations in C The RAND Corporation 2016.

The Welfare Effects of Endogenous Quality Choice in Cable Television Markets

“…In order to find instruments for the demand-side estimation we use the following four arguments. The discussion here is similar to that used recently in Shcherbakov (2012).…”

“…For each offered bundle, we observe the price charged, its market share, and the television networks it offers. Following previous work in this literature (Chu (2010), Shcherbakov (2012)), we use a weighted total number of television networks in a bundle as our measure of quality for that bundle, with weights for each channel given by the national average input costs paid by cable systems for that channel. 8 We also observe (at the market level) variables that shift demand and costs across markets.…”

Demand for Communications Services – Insights and Perspectives

“…The estimated switching cost is about 23 % of annual consumer expenditures on the media sources that comprise their media environment. For comparison, Shcherbakov (2007) estimated that switching costs comprise about 32 and 52 % of annual expenditures on cable and satellite television services, respectively.…”

Can Switching Costs Reduce Prices?

“…They use a model with multiproduct firms and myopic consumers. Prices and profits decrease with switching costs With a structural model Shcherbakov (2016) estimates a model of dynamic consumer behavior with switching costs in the market for paid-television services using data on cable and satellite systems across local US television markets.…”