This graph depicts the consumer welfare effects of telco entry into video markets. The initial effect is a reduction in the price of video services, holding quality constant. There is a large body of empirical evidence (see, e.g., GAO, FCC) showing that incumbent cable operators reduce their prices significantly in response to wireline competition. The reduced price of video service generates savings for "infra-marginal" video customers and surplus for "marginal" video customers--that is, customers who were just not willing to subscribe to video service at the pre-entry prices. Because the fiber networks employed by the telcos will be able to carry more channels and offer more interactive services than extant cable networks, cable operators are likely to react to telco entry by increasing the quality of their offerings (for example, HD video on demand). This quality increase comes at a price, but consumer welfare increases on net so long as the willingness to pay for the quality improvements exceeds the incremental price of those improvements. For a more detailed explanation of these effects, see Crandall and Litan (2006).
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