Firm Behavior in Franchise Monopoly Markets

Abstract

This article presents empirical evidence concerning the value of franchise bidding competition as a means of controlling natural monopoly behavior. The analysis focuses on the cable television industry, using data collected in a survey of local government officials in cabled communities throughout the continental United States. One important potential problem raised by critics of franchise bidding is the ability of franchise winners to engage in ex post opportunistic behavior by reneging on the promises that they made in order to win the franchise contract. The results of my analysis suggest that although franchise competition does lead firms to engage in some degree of opportunistic behavior, the extent of opportunism is not severe. Furthermore, reputation effects appear to play a role in constraining firm behavior, while rate regulation actually seems to exacerbate ex post behavioral problems.

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