Working Paper No. 12-06

Multiproduct Firms, Product Bundling and Market Entry
Jieun Chang
October 2012

ABSTRACT

High-speed Internet providers in the U.S. offer mixed bundling, which consists of subscription television, telephone, and high-speed Internet. This study aims to examine the two opposing influences of mixed bundling offered by an incumbent cable system on the probability of a telephone company's entry into the high-speed Internet market: the demand effects and the retention of consumers. In terms of demand effects, an incumbent's provision of mixed bundling implies market demand for mixed bundling and thus increases the probability of entry by the telephone company that prepares to provide mixed bundling. On the contrary, an incumbent's mixed bundling leads to the retention of consumers. As consumers are locked into mixed bundling offered by an incumbent cable system, this paper assumes that consumers are less likely to switch from an incumbent cable system's mixed bundling to high-speed Internet service offered by the entrant. In terms of the retention of consumers, it is expected that the probability of entry is decreased by an incumbent cable system's mixed bundling. Therefore, the probability of entry is determined by the relative size between demand effects and the retention of consumers created by an incumbent cable system's mixed bundling. To distinguish the retention of consumers from demand effects, this paper uses the interplay between mixed bundling provided by an incumbent cable system and measures of consumer preferences such as income and education. Empirical findings in this paper suggest that the probability of entry in the high-speed Internet market decreases with median income or average years of schooling in markets where an incumbent cable system offers mixed bundling. Since markets with higher income or more years of schooling can have higher opportunity costs of time taken to switch service providers, these findings imply that the probability of entry decreases with higher opportunity costs of time when an incumbent cable system offers mixed bundling.

JEL classification: L11, L15, L86, L96
Keywords: Entry, High-speed Internet, Multiproduct firms

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