Dividing Bundled Surplus: The Case of the Cable Television Industry

Abstract

A cable operator chooses to bundle or provide programs 'a la carte by striking a balance between the incentive to maximize total surplus and minimize transfer payments to program providers. Importantly, a cable operator's decision to bundle or provide programs 'a la carte maximizes total producer surplus if the cable operator's bargaining power (i.e., capacity to extract a greater share of surplus in negotiations with program suppliers) is sufficiently high. However, a cable operator in a weak bargaining position might strategically choose to bundle or unbundle viewer channels in order to enhance its bargaining position with individual program suppliers, even when this decision reduces total surplus. Thus, it is plausible that regulations which cap the market share or impose 'a la carte on cable operators may reduce total surplus.