Product specification, multi-product screening and bundling: the case of pay TV

The paper uses a multi-product screening model to explore how pay-TV distributors allocate channel capacity to different program types and how they construct the bundles of channels that subscribers chose from. In contrast to the standard finding on second-degree discrimination, it shows that the optimal bundle composition and prices remove all consumer surplus. It also shows that the specification of the bundle targeted at the subscribers with the highest willingness to pay does not maximize their utility. Finally, it determines that a profit-maximizing firm allocates fewer channels than is optimal to a type of content preferred by the average viewer. In this regard the paper challenges the often repeated claim that for-profit television provides too little programming targeted at minority tastes.