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The Consumer Gains from Direct Broadcast Satellites and the Competition with Cable TV

Austan Goolsbee
Amil Petrin

Abstract

This paper examines direct broadcast satellites (DBS) as a competitor to cable. We first estimate a structural consumer level demand system for satellite, basic cable, premium cable and local antenna using micro data on almost 30,000 households in 317 markets, including extensive controls for unobserved product quality and allowing the distribution of unobserved tastes to follow a fully flexible multivariate normal distribution. The estimated elasticity of expanded basic is about -1.5, with the demand for premium cable and DBS more elastic. The results identify strong correlations in the taste for different products not captured in conventional logit models. Estimates of the supply response of cable suggest that without DBS entry cable prices would be about 15 percent higher and cable quality would fall. We find a welfare gain of between $127 and $190 per year (aggregate $2.5 billion) for satellite buyers, and about $50 (aggregate $3 billion) for cable subscribers.