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 |
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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 |
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Cross Country Study?: | No |
Comparative Study?: | No |
Literature review?: | No |
Government or policy study?: | No |
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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
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 |