The Discriminatory Incentives to Bundle in the Cable Television Industry

Abstract

An influential theoretical literature supports a discriminatory explanation for product bundling: it reduces consumer heterogeneity, extracting surplus in a manner similar to 2nd-degree price discrimination. This paper tests this theory and quantifies its importance in the cable television industry. The results provide strong support for the theory and suggest that bundling an average top-15 cable network yields a heterogeneity reduction equal to a 6.0% increase in firm profits (and 5.5% reduction in consumers surplus). The results are robust to alternative explanations for bundling.

Keywords: Bundling, price discrimination, cable television

JEL Classification: L12, M31, L96, L40, L50, C31