Measuring consumer switching costs in the television industry. Unpublished manuscript

Preliminary draft, comments welcome This paper develops and estimates a dynamic model of consumer behavior with switching costs in the market for paid television ser-vices. It is hypothesized that consumer choices of cable versus satel-lite providers are affected by the presence of switching costs, which in turn justifies forward-looking consumer behavior. The model al-lows for persistently heterogeneous consumer preferences. I estimate parameters of the structural model using data on cable and satellite systems across local U.S. television markets over the period 1997-2006. Estimation results suggest switching costs indeed exist in the television industry, amounting approximately $109 and $186 (in 1997 dollars) for cable and satellite systems respectively. Implications of using a static environment or consumer myopia assumptions for the parameter es-timates are discussed. A simple supply side model is used to recover cost structure of cable providers and then to simulate counterfactual experiments measuring the effect of satellite entry on optimal cable policy choice.