wants to change their agreement given all other pairs’ agreements (i.e., each pair-wise
agreement is part of a Nash Equilibrium).
55
The structure of the solution for each bar-
gaining pair nonetheless follows that for bilateral monopolists described above.
7.4.2.2 Bargaining Empirics
Crawford and Yurukoglu (2012) (hereafter CY), building on this theoretical literature
and the empirical work of
Ho (2009), construct an empirical model of demand, pricing,
bundle choice, and bargaining to estimate bargaining parameters between channel con-
glomerates and large pay-television distributors in the US pay-television industry.
CY assume that the input costs (affiliate fees) paid by distributors to channels are the
outcome of bilateral negotiations between upstream channels, or channel conglomerates,
and downstream distributors that meet and negotiate bilaterally in a separate and simul-
taneous manner. Following industry practice, they assume distributors (Multiple System
Operators or MSOs) negotiate on behalf of all their component systems and channel con-
glomerates bargain on behalf of their component channels. They bargain à la Nash to
determine whether to form an agreement, and if so, at what input cost. The ultimate
payoffs are determined by downstream competition at the agreed-upon input costs. Fol-
lowing industry practice, CY assume that the agreements between conglomerates and
distributors are simple linear fees of the form $X per subscriber per month.
CY estimate that most bargaining parameters are between 0.25 and 0.75, discouraging
models that assume take-it-or-leave-it offers on the part of either channels or distributors.
They further estimate that distributors generally have higher bargaining parameters than
channel conglomerates for small channel conglomerates (e.g., Rainbow Media or the
content division of Comcast), but that the situation is reversed for large channel con-
glomerates (e.g., ABC Disney and Time Warner).
56
Among distributors, small cable
operators and satellite providers have slightly less estimated bargaining power than large
cable operators. They also find that bargaining is an important factor in determining what
outcomes would be in a world where distributors were forced to offer channels à la carte,
a topic I discuss further at the end of this section.
7.4.3 Barriers to Entry
As noted in Chapter 1 of this volume, media markets are generally characterized by high
fixed costs, preference heterogeneity, and advertiser support. One feature that
55
Like Rubinstein (1982), Collard-Wexler et al. (2012) similarly specify an alternating-offers representation
of the interdependent bargains inherent in bilateral oligopoly bargaining.
56
In the period CY study and for the 50 or so largest cable channels in their analysis, Rainbow Media owned
AMC and WE: Women’s Entertainment, Comcast owned E! Entertainment Television, the Golf
Channel, and Versus, ABC Disney owned ABC Family Channel, Disney Channel, ESPN, ESPN2, Soap
Net, and Toon Disney, and Time Warner owned the Cartoon Network, CNN, Court TV, TBS
Superstation, and TNT.
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Handbook of Media Economics