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Vertical integration and the must carry rules in the cable television industry: An empirical analysis
Unformatted Document Text:  Must carry rules 8 access to subscribers for unaffiliated program suppliers, including broadcasters. For example, vertically integrated cable firms can achieve transaction efficiency by reducing or eliminating so-called double-marginalization. That is, integrated cable systems pay input (programming) prices at the marginal cost level and thus perceive lower marginal cost in providing the cable services. Such efficiencies are likely to result in lower final- market prices and lead to the carriage of more services, including local stations. However, the efficiency outcome from the elimination of the double marginalization externality may actually induce an integrated system to exclude an unaffiliated channel from its system. This is because for two closely substitutive program services, one affiliated and the other not, it would be more profitable to carry the former than the latter. The net revenue to cable systems for carrying an unaffiliated network may be so low that the net effect is non-carriage. Vertically integrated cable operators may also strategically deny unaffiliated networks access to their subscribers. They are more likely to do so because of their financial and carriage commitment to their own cable networks. By taking advantage of the economies of scale in networking, integrated systems could potentially raise a rival network’s cost and its vulnerability to competition by excluding or otherwise placing the rival network at an disadvantage. This argument applies to local signal carriage, as a reduction in the audience level and further, the program quality of a local signal would theoretically increase the demand for cable program services (Vita, 1997). This motivation for carriage denial is further reinforced by the fact that cable operators and local stations are competitors in the advertising markets (local and national spot). (Salinger, 1991; Waterman, 1996). Waterman and Weiss (1997, chapter 3 and 4) summarize both of the strategic and efficiency-enhancing reasons for vertical integration and evaluate their implications for program supply in the cable industry.

Authors: Yan, Zhaoxu.
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Must carry rules
8
access to subscribers for unaffiliated program suppliers, including broadcasters. For
example, vertically integrated cable firms can achieve transaction efficiency by reducing
or eliminating so-called double-marginalization. That is, integrated cable systems pay
input (programming) prices at the marginal cost level and thus perceive lower marginal
cost in providing the cable services. Such efficiencies are likely to result in lower final-
market prices and lead to the carriage of more services, including local stations.
However, the efficiency outcome from the elimination of the double marginalization
externality may actually induce an integrated system to exclude an unaffiliated channel
from its system. This is because for two closely substitutive program services, one
affiliated and the other not, it would be more profitable to carry the former than the latter.
The net revenue to cable systems for carrying an unaffiliated network may be so low that
the net effect is non-carriage.
Vertically integrated cable operators may also strategically deny unaffiliated
networks access to their subscribers. They are more likely to do so because of their
financial and carriage commitment to their own cable networks. By taking advantage of
the economies of scale in networking, integrated systems could potentially raise a rival
network’s cost and its vulnerability to competition by excluding or otherwise placing the
rival network at an disadvantage. This argument applies to local signal carriage, as a
reduction in the audience level and further, the program quality of a local signal would
theoretically increase the demand for cable program services (Vita, 1997). This
motivation for carriage denial is further reinforced by the fact that cable operators and
local stations are competitors in the advertising markets (local and national spot).
(Salinger, 1991; Waterman, 1996). Waterman and Weiss (1997, chapter 3 and 4) summarize both of the
strategic and efficiency-enhancing reasons for vertical integration and evaluate their implications for
program supply in the cable industry.


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