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Pricing Cable TV

October 19, 2007

The EngadgetHD podcast has discussed the possibility of a la carte pricing for cable channels rather than having to buy access to an entire group of channels to get a few that you might actually watch.

Most people seem to believe they would save money if they were able to buy fewer channels, but that seems unlikely. Rather, cable companies would charge more for individual channels to make the average users bill about the same.

Thomas Hazlett wrote a paper in 2006 on this very subject, arguing that cable companies really throw in unwatched channels for free because of the very low marginal cost of providing access to additional channels. This is then nub of the explanation:

A household subscribes to basic cable if and only if the value of they place on the programming they desire to watch exceeds the retail price. That is true even though no customer watches every channel, but their own customized sub-set of programs. Effectively, the consumer subscribes to realize their individual preferences, and the cable company tosses in the additional channels for free. The practice is highly efficient. It dramatically reduces transaction costs and it prices marginal viewing choices at zero – exactly their marginal cost.

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