All Commentary
Tuesday, December 1, 1998

Public Policy Toward Cable Television: The Economics of Rate Controls

A Superior Analysis of Regulatory Effects in the Cable Market

Robert Ekelund is Lowder Eminent Scholar in the department of economics at Auburn University, Alabama.

In modern times no industry has been regulated, “deregulated,” “re-regulated,” and “re-deregulated” more than cable television. Much has been written about cable regulation, but there is no better chronicle of the most recent (post-1984) high tragicomedy of cable doings than this clear review by economists Thomas Hazlett and Matthew Spitzer. Their account is a case study in what government should not do.

Cable television was initially brought under the regulatory communications umbrella to benefit over-the-air broadcasters in the 1970s, just as motor trucks were regulated at the behest of the railroads in an earlier period of rent-seeking. Regarded initially (and possibly erroneously) as a “natural monopoly,” pre-1984 cable provision was regulated by local governments through franchise-bidding arrangements. These arrangements were supposed to bring the price of cable services close to cost-based levels. Debate continues over whether this form of “regulation” had the desired impact on price. There is no debate, however, on the municipally regulated monopoly’s adverse effects on quality and on investments in new programming.

The Cable Communications Policy Act of 1984 “deregulated” parts of the cable industry, largely freeing cable operators from rate regulations. The predictable result was that between 1987 (the effective date of deregulation) and 1991, there was massive and rapid growth in cable investments and in new technologies. Prices rose, but so did quantity demanded, and service quality also forged ahead. Hazlett and Spitzer demonstrate this with the best available data from the Government Accounting Office, Federal Communications Commission, and private sources. As they point out, a GAO survey showed that the cable companies responded to price incentives by “consolidating packages, adding basic channels, upgrading basic program quality (spending more per channel), marketing basic service more aggressively, and dropping premium rates.” All this, of course, enhanced consumer welfare—a principle that is oft-forgotten in the whole cable regulatory mess.

Predictably, the re-regulation of prices enshrined in the (misnamed) Cable Television Consumer Protection and Competition Act harmed consumers. The authors meticulously examine the economic effects of re-regulation and conclude that the 1992 regulations were ineffective “in suppressing cable rates in quality-adjusted terms.” And they go further to suggest that, while impossible to quantify, “the hidden costs that result from regulation-inspired disorder are almost certainly dominant; the real expense to society involves lost surplus from the services not sold, the program services not begun, and the infrastructure not built.” Cable regulation, in other words, has been the typical case of government’s imposing huge costs in an attempt to solve a minimal or non-existent problem.

Hazlett and Spitzer follow the “economic effects” with the most entertaining discussion of the book—the political economy surrounding the passage and conduct of the 1992 Act. A prediction of who gains and who loses from the imposition of nominal price controls in 1992 would not have been hard to make, and the authors clearly explain the outcomes. Naturally, cable operators and programmers opposed passage, while TV broadcasters and telephone companies supported it. Politicians, eager to seize a consumer-oriented election issue, complied with the latter’s desires. As usual, the interests of consumers counted for very little in the political calculus.

After a discussion of new forms of competition on the horizon, Hazlett and Spitzer end with this strong conclusion: “unregulated cable monopoly works better for consumers than regulated monopoly even in the face of anticompetitive barriers (yielding substantial market power) and during relatively brief adjustment periods.”

This excellent study is strongly recommended as a superior analysis of regulatory effects in the cable market. When rent-seeking coalitions become strong enough to effectively demand new forms of regulation, in cable or any other market, politicians will be ever eager to supply them. Greed is alive and well in D.C., Gotham, and the provinces, and there is no end in sight for the political wrangling over cable TV. But if economists view their role as devising policies to achieve normative goals—such as eliminating dead-weight regulatory losses—perhaps they should become better “journalists” for the intelligent layman. The tale of the effects of cable regulation by Hazlett and Spitzer could and should serve as a model.