Consider a monopolist which sells two different goods to two independent markets. The firm sets the profit maximizing price in the two separate markets and suppose one of those prices is high and the other is low. Now suppose the firm bundles the two goods:  they are no longer sold separately but instead if you want one you must buy both.  The profit-maximizing price of the bundle will be higher than the low priced good but lower than the high priced good.  Consumers of the previously low-priced good are worse off, consumers of the previously high-priced good are better off because of the bundling.

This is one simple point to have in mind when thinking about bundling of cable channels versus a la carte pricing. The bundling mixes the elasticities of the two separate demand curves and leads to pricing in between the individual profit-maximizing prices.  If sports channels are in high demand and food channels are in low demand then people who like food but not sports are justified in complaining about bundling.

But as Alex Tabarrok points out, these complaints are often poorly targeted, instead focusing on the differential costs cable networks charge the cable companies for access.  Bundling is often viewed as a way of cross-subsidizing high-cost cable channels by raising prices on subscribers who view low-cost channels.  For example Kevin Drum, responding to an article in the LA Times breaking down the cable companies’ balance sheets, asks for a la carte pricing so that

“sports fans would be forced to pay the actual cost of their sports programming without being subsidized by the rest of us.”

Alex presents a simple example to demonstrate that this focus on costs is misguided. But just because they’ve got their reasoning wrong doesn’t mean they came to the wrong conclusion.  And in debunking the analysis Alex himself overlooks the basic point about bundling above.

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