COMPETITION VS. FRANCHISE MONOPOLY IN CABLE TELEVISION

Thomas Hazlett

Contemporary Economic Policy, 1986, vol. 4, issue 2, 80-97

Abstract: A modern defense of public utility regulation has arisen from the “transactions costs” literature. Traditional economic theorists called for government to establish regulated, franchise monopolies to guard against over‐investment and wasteful duplication in natural monopoly (i.e., cost subadditive) markets. However, the new view is that monopoly licenses are issued to promote investment into markets where suppliers must sink considerable sums of specific…nonsalvageable…capital. Consumers, in this scenario, “delegate” their choice‐making to political or bureaucratic agents, who administer day‐to‐day and year‐to‐year arrangements with a monopoly producer in a long‐term exclusive‐dealing arrangement. This may be a plausible explanation for the issuance of legal monopoly rights. But the troubling question regarding the public agency is: why should self‐interested political agents create proconsumer regulatory contracts? They might instead be expected to maximize political clout by erecting monopolistic restrictions and directing excess returns to effective distributional coalitions. These competing explanations for the political issuance of monopoly franchises are contrasted in this paper through the use of legal and economic evidence in the cable television industry.

Date: 1986
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