Vertical Integration and Consumer Welfare in the Cable Industry

Article excerpt

The increase in concentration within the cable industry has been paralleled by growth in vertical integration. A recent study reports that vertical integration between MSOs and cable program suppliers is extensive and the extent has markedly increased since the mid-1980s (Waterman & Weiss, 1993b). In fact, vertical integration has long been one of the major concerns in the realm of mass media, tracing back to the historic Paramount case (U.S. v. Paramount Pictures, 1948) in the motion picture industry. Hence, neither the phenomenon nor the controversies of vertical integration are unique to the cable industry. But, partly because of the growing importance of its product, partly because of the very numerous nonintegrated competitors, suppliers, and customers interspersed throughout it, the cable industry provides the most controversial, if not the purest, example of the problems that arise when size and market dominance are associated with vertical integration.

For the policy maker, vertical integration raises issues of preserving freedom of access by information providers to the public and of achieving maximum diversity of information products (Brennan, 1990). For the economist, on the other hand, vertical integration raises issues of economic efficiency (Waterman & Weiss, 1993a). Virtually all discussion regarding vertical integration issues, thus far, seems to focus primarily on the former area-access of program suppliers to the public (Klein, 1988; NTIA, 1988; FCC, 1990; Waterman & Weiss, 1993b). As local monopolists, however, integrated MSOs have a variety of other opportunities to behave differently towards affiliated and non-affiliated networks when both are offered on its menu (Waterman & Weiss, 1993a). For example, since the Cable Consumer Protection and Competition Act of 1992 and underlying antitrust acts allow cable programming networks to charge cable operators differential rates for their programming services for "legitimate business reasons," large integrated MSOs can get volume discounts from their network affiliates. In reciprocity, the network affiliates can be placed on better channel positions on the local systems.

To date, these issues have been treated from the point of the bilateral bargaining relationship between the networks and the operators. In other words, the consequences of vertical integration from the consumer's standpoint have been largely ignored or untested. Thus, the present study seeks to be more inclusive by exploring the direct effect of vertical integration on consumer welfare in price and content diversity. Specifically, how do consumers get these benefits from vertical integration? Is massive vertical integration in any sense a necessary or socially desirable consequence of the economic and physical characteristics of cable television production and distribution? The answers to these questions are sharply divided into two different theories.

Procompetitive Consequences of Vertical Integration

Efficiency-Enhancing Effect

Since Ronald H. Coase's pioneering research (1937), many economists have viewed the abandonment of the market implied by vertical integration as a socially desirable adaptation because vertical integration tends to reduce the misallocation of resources (Spengler, 1950; Bork, 1954; Comanor, 1967; McGee & Bassett, 1976; Perry, 1978; Williamson, 1971, 1974, 1979, 1985). For example, in current antitrust enforcement, there is a general presumption that vertical mergers are not anticompetitive. The successive monopoly model, frequently attributed to Spengler (1950) and Machlup and Taber (1960), is a major intellectual impetus for that policy. It says that vertical integration results in a reduction of the final good price by eliminating the double marginalization (Salinger, 1991). In this view, therefore, integration eliminates a dead weight loss resulting from double monopoly markups on product price and increases consumer welfare because the price of the final product is reduced in the direction of its marginal cost (Waterman, 1993). …