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Cable Wars Case Study: Government Regulation, Natural Monopoly, and Market Power

The Goals of Government Regulation in the Cable TV Industry

This assignment is based on the Cable Wars case study, which is available on Blackboard. This case covers the regulatory policy discussion surrounding the provision of cable television in the mid-1980s, with a focus on issues of natural monopoly, potential abuses of the resulting market power, and changes over time in the features of this market that might cause policymakers to reconsider the merits of regulating it today.

You may work in groups of at most 3 students; you are of course free to work alone if you prefer to do so, and the assignment is designed to be perfectly manageable for a single student to complete individually. This assignment is due via Blackboard (Word or pdf document; the submission link is in the Assignments section) on the date specified in the syllabus (only one person per group should submit the assignment).

All questions should be answered using the information provided in the case study and the tools you have learned in this course; no outside research is expected. The assignment should be typed, with the exception of any (optional) graphs that you wish to include, which may be done by hand and scanned. Each question can be answered separately; you do not need to make them fit together in an essay format (this is not a policy memo, though it covers the sorts of points that would be found in one; think of this assignment as an “applied problem set” that provides a guided introduction to economic policy analysis). Please do not include the questions/prompts in your submitted assignment, just your responses (appropriately numbered).

After reading the case and familiarizing yourself with the relevant issues, you should provide written answers (supported by specific evidence from the case when relevant) to the following questions. Questions 1 and 2 should be answered based on the situation that existed at the time covered by the case (mid-1980s), not the present day. Question 3 specifically asks about how things differ today given how the situation has changed since the 1980s

1. Government regulation often pursues a variety of goals simultaneously, and some of these goals may not be clearly or explicitly identified or acknowledged. In the process of establishing regulations to protect consumers from monopoly power, for example, it is often tempting to include provisions intended to advance other social goals. The following are among those discussed in the case as elements commonly incorporated into regulation constraining the behavior of cable TV companies:

Determining Whether Cable TV is a Natural Monopoly

Universal cable service (city-wide wiring, service available in all neighborhoods)

Maximum rates (prices)

Service quality standards (e.g., minimum number of channels)

Provision of channels devoted to specific programming (public access, educational, government, etc.)

a.Which of the common elements of municipal regulation listed above can be justified by the goal of providing consumer protection from monopoly power? Explain the advantages of these regulatory provisions (i.e., what are the benefits of imposing this sort of regulation on a monopolist?)

b.What are some possible rationales for the other elements? (What motivates them, if not protection from market power?) 

2.The rationales for many of the regulatory strategies considered in the case rely on the assumption that cable TV is a market in which a provider will have a natural monopoly (i.e., that the provision of cable TV exhibits economies of scale). In order to identify the proper policy action in this context, it is thus essential to determine whether or not cable TV is actually an example of a natural monopoly (and if so, what the implications are for the design of the optimal policy response).

a.How relevant does the natural monopoly rationale for regulation seem to be in this situation (i.e., does cable TV appear to be an example of a natural monopoly)? Clearly present specific evidence from the case that supports your position.

b. If cable TV is in fact a natural monopoly, what are the disadvantages of attempting to remedy this situation by regulating the cable TV provider to charge a rate (price) equal to its marginal cost?

c. Being a monopoly does not guarantee that a cable TV company will have much market power, even if it is a natural monopoly with substantial economies of scale. Rather, the degree of market power enjoyed by a cable TV provider is determined by the price elasticity of demand for its services, which depends on the alternative options that are available to consumers. What alternative products or services may limit cable TV’s market power, even if cable TV is in fact a natural monopoly?

d. Based on the evidence presented in the case, how strong is the competition that cable TV faces from these alternatives (i.e., how much market power is a cable TV provider likely to possess)? [Keep in mind that the availability of substitutes varies across the different areas that cable TV serves (large cities vs. small cities and rural areas) and the different services/types of entertainment that it provides (news, movies, sports, and general entertainment) – your answer should address the fact that the amount of market power possessed by a cable TV provider will depend on these details.]

3. The case describes the discussion surrounding regulation of cable TV at a particular point in time, but in practice it is extremely important to keep in mind that regulation should not be a permanent policy that is imposed and then never revisited. Instead, it is an ongoing process – regulators should monitor how relevant features of the market are changing over time and consider whether existing policies are still appropriate in the current environment, particularly when significant technological progress occurs.

How would you expect the degree of market power possessed by a monopoly provider of cable TV in a particular market today to compare to the amount that it would have possessed at the time the case was written (in the 1980s)? Explain.

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