Can Reducing the Size of the Pie Enhance Bargaining Position? The Case of the Cable Television Industry

A cable operator chooses to bundle or provide programs à la carte by striking a balance between maximizing total surplus and minimizing transfer payments to program providers. We show, using general demand and cost functions, that a cable operator’s decision to bundle maximizes total producer surplus if the cable operator’s bargaining power is sufficiently high, and that a cable operator in a weak bargaining position might strategically choose to 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 that cap market share or impose à la carte on cable operators may reduce total surplus. Under more restrictive conditions, we extend the analysis and explore consumer and social welfare.