Arrows up or down: The entry of a satellite TV firm consumer surplus, in part because the cable company the quality of service while either price or price by a relatively small amount. 

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Application 1 SATELLITE VERSUS CABLE APPLYING THE CONCEPTS #1: How does market entry affect prices? Consider the market for television signals provided to residen- tial consumers. How will an existing cable-TV provider respond to the entry of a firm that provides TV signals via satellite? In most cases, the entry of a satellite firm causes the cable firm to improve the quality of service and decrease its price, so con- sumer surplus increases. In some cases, the cable company improves the quality of service and increases price. Because the service improvement is typically large relative to the price hike, consumer surplus increases in this case too. On aver- age, the entry of a satellite firm increases the monthly con- sumer surplus per consumer from $3.96 to $5.22, an increase of 32 percent. Related to Exercises 1.6 and 1.8. SOURCE: Based on Chenghuan Chu, "The Effect of Satellite Entry on Cable Tele- vision Prices and Product Quality," RAND Journal of Economics 41 (2010), pp. 730-764.