Entry Deterrence and New Technology Deployment in Cable Tv Markets

Abstract: This paper demonstrates that private incumbent firms engage in behavior to prevent potential entry by public agencies. From the late 1990s to the mid 2000s, incumbent US cable TV firms invested billions of dollars in new technology to upgrade their systems from one-way to two-way capability. I show that incumbent systems timed their upgrades so as to deter potential entry by cities with municipal electric utilities. On average, incumbent firms upgraded their systems 20% faster when the city owned a municipal electric utility. The result is robust to a number of alternative explanations; in particular, the effect disappears when a state passes a law restricting the city’s ability to build and operate a cable TV system. I also show that the incumbent firm’s response to potential entry by the city was greater than the response to potential entry by a private firm. The results suggest that incumbent firms engage in stronger ex ante deterring responses when the potential entrant is asymmetric. In the context of this study, the asymmetry arises from the different objectives pursued by private and public firms. These results should be of interest to firms that operate in regulated industries or in markets with potential or actual state-owned competitors such as those in China and the EU.