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Marginal Cost Pricing, Investment Theory and CATV

THIS paper will explore the implications of the theory of marginal cost pricing with regard to the regulation of Cable Antenna Television systems. While the chief concern will be with optimal pricing of the various service dimensions of CATV systems, the paper also deals with certain related topics -particularly that of optimal investment in the CATV industry. The paper begins with a short description of CATV technology and of the costs involved in setting up and operating a cable antenna system. Next, the optimal rate structure for the industry is discussed, and finally this optimal structure is compared with rates currently being charged. From the latter, consideration is given to the question of whether or not current practice can be significantly improved upon. One difficulty in an analysis of this sort is the wide diversity of types of CATV systems. Size of systems ranges from a few hundred subscribers to more than 50,000; some systems originate programming while others do not; some use microwave relays to import signals, others do not; some operate many channels, others only a few; some may in the future sell their services on a per show basis (pay TV) while the current practice is not to do so. This problem is handled by first discussing a relatively simple CATV system and then using this relatively simple analysis as a basis for investigating the pricing and investment implications of more complex systems and services. Before proceeding with the analysis it should be emphasized that this paper is concerned only with allocative efficiency. It is not concerned with distribution. Also, the usual assumption is made that the prices people are willing to pay for things accurately reflect the value-that is, the marginal benefits-that people receive from those things. If a given object is worth $4 to one person and $6 to another person, economic efficiency requires assigning that object to the person who values it at $6. This is a necessary condition for welfare maximization in a Pareto sense since, if the object were