| This dissertation characterizes how and when quality levels are chosen in an industry where products are differentiated by quality, evaluates the importance of market conditions affecting quality choices, and estimates how much market power is gained from product differentiation in the cable television industry.;Quality distortion is a significant source of market power for a multiproduct firm. While the incentive for distortion is clearly due to differences in consumer tastes, previous studies have found that the direction of distortion is unpredictable but mainly depends on the assumptions about total and marginal utilities. We examine assumptions and constraints in a profit-maximization model for a multi-product monopolist, and derive a complete and systematic characterization of quality choices based on the level of reservation quality, i.e. competition. Quality levels are chosen optimally without distortion if two efficient qualities, or quality levels under full competition, are separated by a reservation quality or a competing product. Qualities are distorted when a line of products is either lower or higher than the quality of a reservation/competition product. The direction of distortion is always toward the reservation/competition product.;With demand data lacking, previous empirical studies of the cable industry have not considered product differentiation explicitly. The increasing use of cable service tiers necessitates that we examine implications of product differentiation. Specifically, we evaluate what factors affect cable operators' decision to differentiate, and measure the extent of market power gained from product differentiation. The study shows that competition from over-the-air television is the overriding factor in their decision to tier. Previous studies found that over-the-air television had little effect on cable product choices. When measuring market power and price increases, previous studies also ignored the effects of product differentiation. Without distinguishing market power gained by differentiating products from market power due to a monopolistic market structure, their estimates for monopoly prices are biased upward. Our result indicates that tiering increases cable prices substantially even when market and system characteristics are similar. |
