Bundling Pay Television Enhances Consumer Welfare

This video from Alex Tabarrok and the MR University course on Media Economics offers up some good points about why bundling pay television enhances consumer welfare.

He points out that consumers think that “I pay $100 / month for 100 channels so if I could just choose 3-4 channels my pay television bill would be just $3-4”.

This is clearly not the case. The high fixed costs of purchasing content, maintaining a distribution network and splitting the cost of boxes over their useful lives all have to be recovered from the consumer.

Therefore, if John McCain’s bill to force cable TV providers to provide a-la-carte options so ESPN subscribers can just get ESPN while forgoing “paying for something they don’t watch”, the most likely outcome is that ESPN will cost closer to $100 a month!

He also points out the different business models in buying music. You can subscribe to Spotify or Pandora and pay a fixed monthly fee for essentially unlimited, legal music.

The alternative is micropayments through the iTunes store. Micropayments incur higher transaction costs than a monthly subscription fee. iTunes even bunches multiple purchases into a single payment processing transaction to lower their costs of getting paid for $1.79 a track music!

Bundling pay television enhances consumer welfare but consumers don’t realise it – if they were forced to pay for individual channels it is unlikely they would pay less in aggregate.

Consumers hardly win whenever regulators attempt to fiddle with consumer welfare.

There are alternative ways for internet savvy people to enhance their welfare if a pay television provider isn’t giving them what they’re willing to pay for, namely cancelling their subscription and getting a US VPN or billing address.

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