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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 7 cable system even though it is within 35 mile radius from the system and would be entitled for must-carry. In general, however, a close examination of the specific incentives and disincentives involved in the local signal carriage decisions paints a much brighter picture than the one by those favoring must carry regulations. The Effects of vertical integration The previous discussion of the incentives that cable system operators have in the carriage of local broadcast stations did not consider strategic industry behaviors and their implications for local signal carriage. The anticompetitive theory of local carriage denial, however, emphasizes such industrial structure as vertical integration in the cable industry and the strategic practice of market foreclosure it may facilitate. In the cable television industry, market foreclosure by vertical integration can take two forms. First, an integrated cable system operator can deny a rival facility operator (such as a DBS provider) access to an input (a cable network) it owns. Second, an integrated cable system operator can deny a rival program service access to its distribution facilities. The second form of market closure is what concerns the local broadcast stations and the must carry proponents. In addition to outright favoritism toward those cable program services they partially own, vertically integrated cable firms may discriminate against local broadcast stations for other competitive reasons, such as gaining competitive edge in the advertising and/or programming markets. On the surface, cable firms become vertically integrated with program suppliers to enhance transaction efficiency and to strengthen the cable program supply industry by providing it with needed resources. 9 Both motivations, however, may lead to barriers of 9 Theory has suggested that vertical integration has a number of efficiency-improving effects, including eliminating successive monopoly makeup, internalizing quality externalities and reducing transaction costs

Authors: Yan, Zhaoxu.
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Must carry rules
7
cable system even though it is within 35 mile radius from the system and would be
entitled for must-carry. In general, however, a close examination of the specific
incentives and disincentives involved in the local signal carriage decisions paints a much
brighter picture than the one by those favoring must carry regulations.
The Effects of vertical integration
The previous discussion of the incentives that cable system operators have in the
carriage of local broadcast stations did not consider strategic industry behaviors and their
implications for local signal carriage. The anticompetitive theory of local carriage denial,
however, emphasizes such industrial structure as vertical integration in the cable industry
and the strategic practice of market foreclosure it may facilitate.
In the cable television industry, market foreclosure by vertical integration can take
two forms. First, an integrated cable system operator can deny a rival facility operator
(such as a DBS provider) access to an input (a cable network) it owns. Second, an
integrated cable system operator can deny a rival program service access to its
distribution facilities. The second form of market closure is what concerns the local
broadcast stations and the must carry proponents. In addition to outright favoritism
toward those cable program services they partially own, vertically integrated cable firms
may discriminate against local broadcast stations for other competitive reasons, such as
gaining competitive edge in the advertising and/or programming markets.
On the surface, cable firms become vertically integrated with program suppliers to
enhance transaction efficiency and to strengthen the cable program supply industry by
providing it with needed resources.
9
Both motivations, however, may lead to barriers of
9
Theory has suggested that vertical integration has a number of efficiency-improving effects, including
eliminating successive monopoly makeup, internalizing quality externalities and reducing transaction costs


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