Essays on bundling and a la carte pricing in a two-sided model

Minghua Chen

doi:10.17918/etd-3310

My dissertation examines the profitability of bundling and the impact of an a la carte regulation in a two-sided market. This is primarily motivated by the ongoing debate about whether TV cable operators should be forced to offer TV channels on an a la carte basis, as opposed to the current practice where only big bundles of channels are available for viewers. My main contribution is that I formally incorporate the advertising side and I view each TV network as a two-sided platform that wants to attract viewers and advertiser. The first essay is theoretical, the second numerical and the third empirical. In the first essay, I construct a theoretical model to analyze the incentive of a monopolist cable operator to bundle his products. The cable operator chooses how to offer the TV channels to viewers: he can offer them separately (a la carte), together in a bundle (pure bundling), or a combination of the two (mixed bundling). In a one-sided market, the conventional finding is that mixed bundling is the weakly dominant strategy for a seller. However, this may not hold in a two-sided market where the interplay between the two sides (viewers and advertisers) creates new effects. In particular, mixed bundling can generate higher levels of advertising, which hurts viewer and the profits of a monopolist and pure bundling can strictly dominate mixed. Under a la carte pricing, the TV channels will lower the advertising fees so that the advertising levels will be higher than under pure bundling. All else equal, this makes viewers worse off but the monopolistic cable operator better off. However, the cable operator will react by lowering the subscription fees, partially offsetting the negative impact of advertising. In the second essay, I conduct a numerical simulation by relaxing two assumptions made in the first essay. First, viewer willingness to pay for the channels follows a bivariate normal distribution. Second, the license fees are endogenously negotiated and determined by these two parties via Nash bargaining. I numerically simulate the equilibria of no bundling, mixed bundling and pure bundling. I find that bundling attens viewers' demand, and enables the monopolistic cable operator to extract more surplus from consumers. If the upstream network and downstream cable operator are allowed to bilaterally negotiate the license fee, license fees will be higher (lower) under pure bundling depending on whether cable operator has mass (niche) market demand. Advertisement plays a very important role, by incorporating advertisement in our model, it is possible that pure bundling strictly dominates mixed bundling. In the third essay, I empirically estimate the viewers' preference parameters, which give us viewers' dollar valuation for individual channels. I set up a structural model to test the impact of an a la carte regulation in the cable TV industry. I formally model household decision (regarding television-watching and cable package choices), cable operator pricing decisions and television channel advertisement pricing decisions. In the estimation of household television-watching decision, I explicitly incorporate advertising in the utility function and find that advertising levels bring negative utility to most of the consumers. I also estimate the inverse demand for advertising on TV channels. Finally, I conduct a counterfactual simulation to examine how an a la carte regulation will affect the industry.

Essays on bundling and a la carte pricing in a two-sided model

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Essays on bundling and a la carte pricing in a two-sided model

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