AN ECONOMIC MODEL OF CABLE TELEVISION: FRANCHISE BIDDING IN PHILADELPHIA

A proliferation of telecommunications services and a relaxation of federal regulations have encouraged the construction of cable television systems in urban markets. The current practice of allowing competitive bidding for the exclusive franchise to build a cable system is intended to provide monopoly services at competitive prices without the need of extensive public regulation. In this dissertation an economic model is developed to address the question of efficient (Ramsey) prices and optimal system configuration for a multi-product cable system. Econometric and market research techniques are combined to produce equations describing the demand for cable television. An engineering analysis and econometric equations describe costs. The fair rate of return on equity invested in the system is estimated using the Capital Asset Pricing Model. All equations are combined in an interactive, computer model formatted as a pro-forma return-on-investment analysis. Significant economies of scale are measured for the number of subscribers served by a system and for the size of the geographic area. Demand interdependencies among cable television services suggest that the monthly subscriber fee for basic-cable service should decline in real terms as the number of pay-television services increases. A microanalytic examination of the 1979 franchise bidding in Philadelphia reveals that one efficiently priced system resulted when the number of bidders was large. Most prices, however, were set at about industry averages. Competitive bidding did generally produced optimal system configurations, with the exception that government officials encouraged excessive investment in public facilities.