Goolsbee and Petrin (2004)

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Source Details

Goolsbee and Petrin (2004)
Title: The consumer gains from direct broadcast satellites and the competition with cable TV
Author(s): Goolsbee, A, Petrin, A
Year: 2004
Citation: Goolsbee, A., & Petrin, A. (2004). The consumer gains from direct broadcast satellites and the competition with cable TV. Econometrica, 72(2), 351-381.
Link(s): Definitive , Open Access
Key Related Studies:
Discipline:
Linked by:
About the Data
Data Description: To estimate the demand system, the authors use detailed micro data on television choices -expanded basic cable, premium cable, DBS, and local antenna-only and the cable system characteristics of almost 30,000 households living in 317 cable system areas.
Data Type: Primary and Secondary data
Secondary Data Sources:
Data Collection Methods:
Data Analysis Methods:
Industry(ies):
Country(ies):
Cross Country Study?: No
Comparative Study?: No
Literature review?: No
Government or policy study?: No
Time Period(s) of Collection:
  • Non stated
Funder(s):
  • Centel Foundation/Robert P. Reuss Faculty Research Fund
  • National Science Foundation
  • Alfred P. Sloan Foundation

Abstract

This paper examines direct broadcast satellites (DBS) as a competitor to cable. We first estimate a structural consumer level demand system for satellite, basic cable, premium cable and local antenna using micro data on almost 30000 households in 317 markets, including extensive controls for unobserved product quality and allowing the distribution of unobserved tastes to follow a fully flexible multivariate normal distribution. The estimated elasticity of expanded basic is about -15, with the demand for premium cable and DBS more elastic. The results identify strong correlations in the taste for different products not captured in conventional logit models. Estimates of the supply response of cable suggest that without DBS entry cable prices would be about 15 percent higher and cable quality would fall. We find a welfare gain of between $127 and $190 per year (aggregate $2.5 billion) for satellite buyers, and about $50 (aggregate $3 billion) for cable subscribers.

Main Results of the Study

  • The results indicate that the own-price elasticity of expanded basic is at about -1.5 while the demands for premium cable and DBS are substantially more elastic (-3.2 and -2.4). The cross-price elasticities suggest that DBS and premium are the closest substitutes.
  • The supply side results exploit the estimated controls from the structural demand side model and suggest that more competition from DBS is correlated with lower cable prices and somewhat higher quality cable.
  • Overall there is a significant welfare gain to the 16 million satellite buyers between $2-3 billion, depending upon whether changes in cable prices and characteristics are added back into the calculation. The aggregate gains to the 70 million cable users amount to between roughly $3-4 billion.
  • The findings suggest large gains from DBS entry, some of which are not captured if the price and characteristics' response is ignored. The overall gains from this product introduction may be as large as $7 billion, illustrating once again the importance of understanding the impact of new goods on consumer welfare.


Policy Implications as Stated By Author

The flexibility of the multivariate normal distribution is crucial for understanding consumers' true substitution patterns as the correlation of unobserved tastes for DBS and premium cable are particularly high and are not captured in a conventional logit model.


Coverage of Study

Coverage of Fundamental Issues
Issue Included within Study
Relationship between protection (subject matter/term/scope) and supply/economic development/growth/welfare
Relationship between creative process and protection - what motivates creators (e.g. attribution; control; remuneration; time allocation)?
Harmony of interest assumption between authors and publishers (creators and producers/investors)
Effects of protection on industry structure (e.g. oligopolies; competition; economics of superstars; business models; technology adoption)
Green-tick.png
Understanding consumption/use (e.g. determinants of unlawful behaviour; user-generated content; social media)
Green-tick.png
Coverage of Evidence Based Policies
Issue Included within Study
Nature and Scope of exclusive rights (hyperlinking/browsing; reproduction right)
Exceptions (distinguish innovation and public policy purposes; open-ended/closed list; commercial/non-commercial distinction)
Mass digitisation/orphan works (non-use; extended collective licensing)
Licensing and Business models (collecting societies; meta data; exchanges/hubs; windowing; crossborder availability)
Fair remuneration (levies; copyright contracts)
Enforcement (quantifying infringement; criminal sanctions; intermediary liability; graduated response; litigation and court data; commercial/non-commercial distinction; education and awareness)
Green-tick.png

Datasets

Sample size: 300000
Level of aggregation: Household
Period of material under study: Non stated


Sample size: 317
Level of aggregation: Market
Period of material under study: Non stated