Smaller Pie, Larger Slice: How Bargaining Power Affects the Decision to Bundle

Nodir Adilov 1 , 1 , Peter Alexander 2 , 2 ,  und Brendan M. Cunningham 3 , 3
  • 1 Indiana University - Purdue University Fort Wayne, nodir.adilov@gmail.com
  • 2 U.S. Federal Communications Commission, peter.alexander@gmail.com
  • 3 U.S. Naval Academy, bcunning@usna.edu

Abstract

A cable operator chooses to bundle or provide programs a la carte by striking a balance between maximizing total surplus and minimizing transfer payments to program providers. Using general demand and cost functions, we show that a cable operator's decision to bundle maximizes total producer surplus if the cable operator's bargaining power is sufficiently high, and that a cable operator in a weak bargaining position might strategically choose to unbundle viewer channels in order to enhance its bargaining position with individual program suppliers, even when this decision reduces total surplus. It is, therefore, plausible that regulations to cap market share or impose a la carte on cable operators may reduce total surplus, and absent offsetting increases in consumer welfare, such policy measures may reduce total welfare. Under more restrictive conditions, we extend the analysis and show that consumer and social welfare under bundling or a la carte depends on both bargaining power and advertising rates. Our results imply a monopolist does not necessarily increase deadweight loss, and under certain circumstances a monopolist's bargaining outcomes yield higher social welfare.

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The B.E. Journal of Economic Analysis & Policy (BEJEAP) is an international forum for scholarship that employs microeconomics to analyze issues in business, consumer behavior and public policy. Topics include the interaction of firms, the functioning of markets, the effects of domestic and international policy and the design of organizations and institutions.

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