New Products, New Programs, and Prices: Measuring Consumer Benefits to Changes in Cable Television Choices, 1989-1995

Abstract

This paper evaluates the economic consequences of quality change and new service introductions in the cable television industry over the period 1989-1995. To address these issues, we develop and estimate a discrete-choice, differentiated product model of the demand for and the pricing of the complete set of cable services offered by systems in the industry. Our goal is to measure the benefits of changes in the choice set facing consumers over time. Our principal application is the construction of a quality-adjusted price index for cable television service for the period 1989 - 1995. In addition to measuring the total change in prices over this period, we decompose changes in this index to changes in the set of services offered, in the programming offered on those services, in the prices of those services, and in demographic and market characteristics. We then compare this index to that obtained by the Bureau of Labor Statistics as part of the Consumer Price Index. Failing to account for the benefits of increased quality and variety in cable television services yields an index which largely duplicates the 14.6% price increase reported by the Cable CPI between January, 1989 and July, 1995. However, incorporating consumer benefits from the addition of new services, the addition of programming to all services, and increased quality of existing programming yields an aggregate index which suggests a slight decrease of 2.2% in cable prices.