Arnold Kling  

The Mixed Blessing of Price Discrimination

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Who is a Middle American?... Milton Friedman and the Philli...

Gabriel Rossman gives an excellent explanation of price discrimination in the context of cable TV bundling. He writes,


A switch to a la carte will probably result in an increase in consumer surplus per unit demanded but a drastic decrease in quantity supplied...

television may not be economically viable when priced on an a la carte basis and this could lead to a decline in volume and possibly quality of original programming.

Read the whole thing. Given that Price Discrimination Explains Everything, one cannot be too well versed in the topic.

Overall, I am not as pessimistic as Rossman. Bundling is not the only solution to pricing for information goods. Historically, artists and entertainers relied on wealthy patrons. Individual patrons could fund some projects. Clubs of patrons can fund more expensive ones. Yes, there would be free riders among the patrons within a club, but there is no perfect funding mechanism.

Note that my consumption of television and movies is probably in the bottom 1 percentile among Americans, so I may not be the best person to opine on this topic.

The problem of revenue models for stuff that can be copied and distributed for free is going to be with us for quite some time. Apple is not going to solve it. Amazon is not going to solve it. But they are not making it worse.

Thanks to Tyler Cowen for the pointer.


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COMMENTS (10 to date)
Troy Camplin writes:

I'm still looking for patrons. If you know of any who want to support a classically liberal poet/playwright, please let me know.

My point being: surviving on patronage is not all it's cracked up to be.

Of course, if there were real demand for a la carte, it would exist (assuming there are no barriers to entry, of course).

Pat writes:

Websites like ThePoint could have an effect. People could make a contribution to a series contingent on enough other people contributing - a sort of group patronage

Robert Johnson writes:

Others have made the point (thank you Larry Lessig and Clay Shirky, to name two) but, "television may not be economically viable when priced on an a la carte basis" really means, "With the current business models that are popularly deployed, television may not be economically viable when priced on an a la carte basis."

I think the success of Netflix's streaming video business model supports this point. Slate reports that Netflix is now responsible for a significant chunk of all internet traffic. http://www.slate.com/id/2273314?nav=wp

Brett writes:

I read the Rossman piece, and I`m confused - is he talking about people paying for certain channels on an individual basis, or individual episodes of a show?

If it`s the former, then I`m not sure I`m convinced by his argument. Why would people paying for individual channels lower productionvalues and the number of channels? If anything, it might allow for the rise of hyper-niche channels.

The latter (individual episode purchases) are more problematic, but mostly for procedural shows where you can avoid a bunch of episodes and not fall behind. I`m also not convinced they`ll be profitable - songs seem to sell on an individual basis, but other things (like newspaper articles) don`t do so well.

Hyena writes:

I think the whole conversation is stupid, actually. All that a la carte pricing is likely to do is make television series aggressively unprofitable as they continue.

We'll probably just trade, at the margin, larger quantities of single shows for smaller quantities of multiple shows.

Jacob Oost writes:

All I know is, we don't know the answer. But only through the free market can there be enough experimentation and risk-taking to arrive at some solutions. A stuffy bureaucrat in DC shouldn't get between me and the peeps I want to buy cable service from, and tell me what I should buy from them and what they should sell to me. This only raises problems, it does not solve them.

Doc Merlin writes:

" Yes, there would be free riders among the patrons within a club, but there is no perfect funding mechanism."

The free riding is the point. A patron WANTS people to free ride off of him. He gets utility from their free riding.

Thomas DeMeo writes:

The more interesting part of this is the cable companies and their bundle of the network pipeline with their subscription models. This model is slowly coming apart because they are also forced to provide the means of their destruction; the internet.

The major content providers are caught between the old way and the new way. The contribute some content to the new way, while hoping to not destroy their revenue streams from the cable providers. This will all fall apart in the next few years.

Gabriel rossman writes:

arnold,
thanks for the link and thoughts. i hadn't thought of an NPO (or quasi-NPO) model but it makes a lot of sense. this was certainly the case with things like the performing arts which were almost entirely commercial in the mid-19th c but have increasingly used the NPO form in part as a reaction to Baumol's disease. you're already starting to see shifts towards this with news. i could easily imagine that, absent cable carriage fees, Fox News or MSNBC would be underwritten by ideological philanthropists, just as National Review and the Nation always have been. similarly, you might see something that is formally a for-profit firm but in practice subsidized by the owners, as with The Atlantic.

troy,
traditionally there were two barriers to entry. the one that is disappearing is that cable companies had natural monopolies over tv distribution. this is becoming obsolete with satellite tv, streaming video, etc. the one that remains is copyright. an a la carte market is only valuable if it has popular content and the content providers know they can gain more total revenue by engaging in bundling.

robert and brett,
i'm not arguing that bundling (or for that matter, ad-supported) will completely disappear but it will diminish. the status quo is that all new tv content is bundled, including high value content. i'm thinking that much of this will break off and bundling will be relegated to aggregating low value stuff for which the transaction costs / behavioral economics effects make bundling better suited. the reason is as articulated in my original post on my site, but you can elaborate it more fully by noting that if the a la carte price point is $2 then nobody would pay $13 for the bundle of five shows when they could buy just their three favorites for $6. if some shows are available on the a la carte market but not others then the bundle becomes relatively unattractive to consumers. hence staying out of the a la carte market is a prisoners dilemma for the content providers.

to put it concretely, i think the "Hulu Plus" business model is in much more direct competition with iTunes/Amazon than with Netflix. to the extent that Hulu Plus is a success it will be because the studios maintain a united front against ITunes/Amazon and/or consumers have an irrational fear of "being on the meter." (I say this as one of the relatively few people who has good credit but still uses a prepaid cell phone).

jacob,
read the whole thing and you'll see that the current push for a la carte is coming from private firms (Apple and Amazon) although there have been previous aborted regulatory pushes from the FCC and Congress. i agree with your general humility though -- predictions are hard, especially about the future.

Isegoria writes:

It is surprisingly difficult to explain to someone that you're not paying for hundreds of cable channels you never watch, because it contradicts basic folk-economic intuitions.

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