Monday, July 1, 2013
Posted by D. Daniel Sokol
Sutirtha Bagchi, The Stephen M. Ross School of Business at the University of Michigan and Jagadeesh Sivadasan, University of Michigan - Stephen M. Ross School of Business analyze Barriers to Entry and Competitive Behavior: Evidence from Reforms of Cable Franchising Regulations.
ABSTRACT: Between 2005 and 2008, 19 of the 50 states of the U.S. reformed the franchising process for cable television, signi cantly easing entry into local markets. Using a difference-in-differences approach that exploits the staggered introduction of reforms, we find that prices for "Basic" service declined systematically by about 5.5 to 6.8 percent following the reforms, but we find no statistically significant effect on average price for the more popular "Expanded Basic" service. We also find that the reforms led to increased actual entry in reformed states, by about 11.6% relative to non reformed states. Our analysis shows that the decline in price for "Basic" service holds for markets that did not experience actual entry, consistent with limit pricing by incumbents. To control for potential state-level shocks correlated with the reforms, we undertake a sample-split test examining changes in local markets which faced a greater threat of entry (because they were close to a prominent second entrant); we find larger declines in prices, for both "Basic" and "Expanded Basic" services in these markets. Our results are consistent with limit pricing models that predict incumbents respond to increased threat of entry, and suggest that the reforms facilitated entry and modestly benefitted consumers in reformed states.