Is the Canadian Cable Television Industry a Natural Monopoly

Chapter Outline

Preface

Chapter Title Page

Preface Outline 1

I Introduction 2

A The Canadian Cable Television Industry 2

II Details 3

A Model 3

B Data 4

III Externality Effect 10

III Comparison with Telephone Industry 12

IV References 14

Table Title Page

1.1 2003 Market Share of Canadian Cable Companies. 2

2.1 Canadian Cable Industry 5

2.2 Rogers Communications Incorporation 7

2.3 Shaw Communications Incorporation 8

2.4 Cogeco Cable Company 9

3.1 Marginal Private Benefit 11

3.2 Marginal Private Cost 11

3.3 Demand Schedule of the market 12

Figure Title Page

1.1 2003 Market Share of Canadian Cable Companies. 2

2.1 Conventional Depiction of Natural Monopoly 4

2.2 Measurement of Possibility of Natural Monopoly 5

2.3 Canadian Cable Television Indusry 6

2.4 Rogers Communications Incorporations 7

2.5 Shaw Communications Incorporation 8

2.6 Cogeco Cable Company 10

3.1 Externality Effect of Regulation of Cable Industry 12

Chapter Introduction

1

A. THE CANADIAN CABLE TELEVISION INDUSTRY

It all started back in 1981 when Vidйotron Ltйe and La Presse introduce the first electronic newspaper via cable in Montreal. One year later, The Canadian Radio-television Commission licensed Canada's first pay services and 58% of home televisions were connected to the cable television.

The majority of industry members have formed an association the CCTA - Canadian Cable Televisions Association, to have a unified word when facing regulators, help promote the industry's services. Table 1.1 and figure 1.1 show that CCTA have through its members a control over more than 70% of the Canadian cable services.

Table 1.1 Market Control (2003)

ROGERS 30.30%

SHAW 27.20%

COGECO 11.20%

EASTLINK 3.20%

ACCESS 1.00%

MONARCH 0.80%

OTHER* 26.40%

TOTAL 100%

*less than 50,000 customers each

Figure 1.1 2003 Market share of Canadian Cable Companies

Since its inception, cable television service has been subject of substantial intervention on the part of regulators in Canada. The Cable television operators are licensed by a single federal regulatory authority, the CRTC. It classifies Licensed Service Areas (LSA) based partly on the current subscription level within the LSA and partly on the quality of broadcast reception available to the service provider.

The issues to be addressed in this paper are the following:

 Was the enforced monopoly provision of basic cable television justified?

Chapter Details

2

A. MODEL

When a monopoly occurs because it is more efficient for one firm to serve an entire market than for two or more firms to do so, because of the sort of economies of scales available in that market. A common example is water distribution, in which the main cost is laying a network of pipes to deliver water.

One firm can do the job at a lower average cost per customer than two firms with competing networks of pipes. Monopolies can arise unnaturally by a firm acquiring sole ownership of a resource that is essential to the production of a good or service, or by a government granting a firm the legal right to be the sole producer.

Other unnatural monopolies occur when a firm is much more efficient than its rivals for reasons other than economies of scale. Unlike some other sorts of monopoly, natural monopolies have little chance of being driven out of a market by more efficient new entrants. Thus regulation of natural monopolies may be needed to protect their captive consumers.

The conventional illustration of natural monopoly in principles textbooks shows the market demand curve intersecting the long run average cost schedule (LAC) in the region of increasing returns to scale.

Figure 2.1 Conventional Depiction of Natural Monopoly

The modern view of natural monopoly (also called the "New Learning") is based on the concept of subadditivity. That is, the most important feature of natural monopoly is a cost function that is subadditive.

If q1, q2, . . ., qk are output bundles that sum to q, then a single firm is superior on efficiency grounds to a multi-firm industry if the following condition holds:

C(q) < C(q1) + C(q2) + . . . + C(qk) (1)

C(q1) can be interpreted as the cost of producing commodity bundle q1. If inequality (1) holds, then a single firm can jointly produce bundles q1, q2, . . ., qk more cheaply than if the bundles were produced separately, or if they were produced by two or more firms.

B. DATA

To recognize whether the Canadian cable television industry can be labelled as a potential natural monopoly, one should understand the performance of the whole industry - based on both basic and non-basic services. Next, the top three companies - Rogers, Shaw & Cogego