Consider the market for television signals provided to residential 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 consumer 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 average, the entry of a satellite firm increases the monthly consumer surplus per consumer from $3.96 to $5.22, an increase of 32 percent.

Question.

How does market entry affect prices?

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