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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 12 the cable television industry. These variables, some at the station-level, some the (cable) system-level and others the (ADI) market-level, are summarized in Table 2 and explained below. System-level variables The system-level variables include total number of subscribers owned by a system’s MSO nationwide (LNSUB), subscriber share of a system in its ADI (SYSSHARE), penetration rate of a system in its franchise area (SYSPENE), channel capacity of a system (CAP), number of plant miles of a system (MILE), age of a system (AGE_C), and viewing share of a cable system’s cable network services in the system’s ADI (SHARE_C). LNSUB and SYSSHARE pertain to firm size, the former at the national level and the latter the regional level. Chipty (1995) showed that both regional and national firm size variables are positively related to the total number of cable services supplied. This is because larger firms enjoy lower marginal cost derived from economies of scale at the regional level and bargaining power at the national level. Therefore, positive effects of these size variables on DROP would indicate that larger MSOs dropped a larger number of over-the-air television stations in order to add more cable networks to their lineups. In addition, SYSSHARE measures the size of a cable system relative to its local media market. According to the anticompetitive theory of signal carriage, a cable system that serves a larger proportion of a station’s potential audience perceives the station to be more competitive and would be more motivated to harm the station (Vita, 1997). 19 19 As discussed earlier, larger firm size can reinforce both efficiency and anti-competitive effects of vertical integration. Thus, bigger and vertically integrated cable systems may carry even fewer stations. To test this hypothesis, an interaction terms that equals LNSUB times VI_N (LNSUB*VI_N) was included in one of the variations of the empirical models. However, the inclusion of this interaction term caused multicollinearity problems due to the extremely high correlations between LNSUB*VI_N and VI_N (r = .998, p <.0001). I therefore avoid using the interaction term in the empirical models.

Authors: Yan, Zhaoxu.
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Must carry rules
12
the cable television industry. These variables, some at the station-level, some the (cable)
system-level and others the (ADI) market-level, are summarized in Table 2 and explained
below.
System-level
variables
The system-level variables include total number of
subscribers owned by a system’s MSO nationwide (LNSUB), subscriber share of a system
in its ADI (SYSSHARE), penetration rate of a system in its franchise area (SYSPENE),
channel capacity of a system (CAP), number of plant miles of a system (MILE), age of a
system (AGE_C), and viewing share of a cable system’s cable network services in the
system’s ADI (SHARE_C).
LNSUB and SYSSHARE pertain to firm size, the former at the national level and
the latter the regional level. Chipty (1995) showed that both regional and national firm
size variables are positively related to the total number of cable services supplied. This is
because larger firms enjoy lower marginal cost derived from economies of scale at the
regional level and bargaining power at the national level. Therefore, positive effects of
these size variables on DROP would indicate that larger MSOs dropped a larger number
of over-the-air television stations in order to add more cable networks to their lineups. In
addition, SYSSHARE measures the size of a cable system relative to its local media
market. According to the anticompetitive theory of signal carriage, a cable system that
serves a larger proportion of a station’s potential audience perceives the station to be
more competitive and would be more motivated to harm the station (Vita, 1997).
19
19
As discussed earlier, larger firm size can reinforce both efficiency and anti-competitive effects of vertical
integration. Thus, bigger and vertically integrated cable systems may carry even fewer stations. To test this
hypothesis, an interaction terms that equals LNSUB times VI_N (LNSUB*VI_N) was included in one of the
variations of the empirical models. However, the inclusion of this interaction term caused multicollinearity
problems due to the extremely high correlations between LNSUB*VI_N and VI_N (r = .998, p <.0001). I
therefore avoid using the interaction term in the empirical models.


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