Reciprocal Buying of Intermeidate Goods among Vertically Integrated Firms: The case of Cable TV Industry

Abstract

Using a dataset of carriage decisions by 943 cable systems for 22 start-up basic cable networks, this study tests the reciprocal carriage hypothesis: the theory that multiple cable television system operators (MSOs) tacitly collude to carry each others' vertically integrated cable networks. The research supports the reciprocal carriage hypothesis by finding that: (1) A vertically integrated MSO is more likely than a non-vertically integrated MSO to carry the start-up basic cable networks of other MSOs; and, (2) a vertically integrated MSO is no more likely than a non-vertically integrated MSO to carry independent start-up basic cable networks. These results make credible an underlying premise of a 30 percent national market share limit that the Federal Communication Commission established in 1993: namely, that MSOs may tacitly collude in their carriage decisions, having the effect of restricting market access to startup cable networks in which those MSOs have no ownership interest. The study suggests the difficulty of the entry and growth of non-vertically integrated independent start-up cable networks. More generally, this study suggests circumstances under which vertically integrated firms may tacitly collude to reciprocally buy each others' intermediate goods.