Measuring consumer switching costs in the television industry

This paper develops and estimates a dynamic model of consumer behavior with switching costs in the market for paid television services. It is hypothesized that consumer choices of cable versus satellite providers are affected by the presence of switching costs, which in turn justifies forward-looking consumer behavior. The model allows for persistently heterogeneous consumer preferences. I estimate parameters of the structural model using data on cable and satellite systems across local U.S. television markets over the period 1997-2006. Estimation results suggest switching costs indeed exist in the television industry, amounting to approximately $109 and $186 (in 1997 dollars) for cable and satellite systems respectively. Implications of using a static environment or consumer myopia assumptions for the parameter estimates are discussed. A simple supply side model is used to recover the cost structure of cable providers and then to simulate counterfactual experiments measuring the effect of satellite entry on optimal cable policy choice.