Price-quality tradeoffs and welfare effects in cable television markets

The Telecommunications Act of 1996 reduced restrictions on the cable TV ind ustry, providing completely deregulated rates in March 1999. Prior to that time the cable industry was generally allowed to increase rates so long as additional channels were supplied. In this paper we develop a simple tradeo ff between price and quality in order to calculate the welfare tradeoff to consumers of the provision of one additional satellite channel. Gauging the impact of this quality change on consumers alone, we conclude that the inc rease in consumer gains due to an extra channel provision are almost exactl y counterbalanced by reductions due to price increases. This ceteris paribu s calculation does not mean, of course, that dynamic supply effects from th e provision and availability of more channels will not increase future comp etition and potential consumer benefits.