Does Video Entertainment Competition Affect Rates?

Competition is supposed to improve consumer welfare by driving prices lower. Perhaps oddly, that does not necessarily seem to be the case for entertainment video prices, at least when looking narrowly at prices for the "expanded basic" tier of service offered by all video service providers.

Over the 12 months ending January 1, 2010, the average price of expanded basic service increased by 3.2 percent, to $54.27, for consumers living in communities where there is "no effective competition," according to the Federal Communications Commission.

For the effective competition communities, the average price of expanded basic increased by 4.6 percent, to $54.77, the FCC study suggests. "What?" you might be thinking. Prices rose more in the competitive markets than in the non-competitive markets? At least for the expanded basic tier of service, that was the case.

That does not mean the same relationship might hold if all fees and features are considered. But the averages of the price differentials for three service packages (basic, expanded basic, next tier) overall between the effective-competition and the non-competitive groups are not statistically significant, the FCC says.

In addition, in contrast to prices charged prior to 2009, expanded basic prices are growing fastest in the effective-competition communities, at 4.6 percent over the 12 months ending January 1, 2010, compared to 3.2 percent over the period for non-competitive communities.

Of course, it always is difficult to measure "productivity" or "value" for products whose characteristics change over time. Whatever the changes in nominal prices, there now are more channels offered in the "expanded basic" tiers, so that the cost-per channel is lower.

Over the study period, price per channel declined by 6.1 percent in non-competitive communities, to
58 cents per channel, and by 10 percent in effective-competition communities, to 51 cents per channel.

Nominal prices, in other words, do not capture the enhanced value provided the added channels. Consumers, though, do not pay on "price per channel," but simply the nominal package price, so that distinction might not be "consumer relevant."

The price per channel is 12.3 percent lower in effective competition communities than in non-competitive communities, which reflects that operators in effective competition communities carry more channels on expanded basic service than in non-competitive communities.