Working Paper: CEPR ID: DP10793
Authors: Gregory S. Crawford; Oleksandr Shcherbakov; Matthew Shum
Abstract: We measure the welfare consequences of endogenous quality choice in imperfectly competitive markets. We introduce the concept of a "quality markup" and measure the relative welfare consequences of market power over price and quality. For U.S. paidtelevision markets during 1997‐2006, we find that not only are cable monopolists' prices 33% to 74% higher than marginal costs, but qualities are also 23% to 55% higher than socially optimal and the welfare costs of each are similar in magnitude. Such evidence for "quality inflation" by monopolists is at odds with classic results in the literature.
Keywords: cable television; endogenous quality; imperfect competition; industrial organization; monopoly; pay television; quality markup; welfare
JEL Codes: C51; L13; L15; L82; L96
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market Power over Price (MPP) (D42) | Welfare Loss (D69) |
| Market Power over Quality (MPQ) (L15) | Welfare Loss (D69) |
| Market Power over Price (MPP) + Market Power over Quality (MPQ) (D42) | Total Welfare Loss (D69) |
| Market Power over Quality (MPQ) (L15) | Quality Markup (L15) |