Entry Deterrence and New Technology Deployment in the Cable TV Industry

Robert Seamans

Haas School of Business

U.C. Berkeley

seamans@haas.berkeley.edu

This paper addresses a gap in the literature by demonstrating that private incumbent firms engage in behavior to prevent potential entry by public agencies.  Many US cities own municipal electric utilities.  In the mid 1990s, several of these cities used the municipal electric utility infrastructure to build cable TV systems and compete with the incumbent private cable TV provider.  From the late 1990s to the mid 2000s, incumbent US cable TV firms invested billions of dollars in new technology to upgrade their systems from one-way to two-way capability.  I show that incumbent systems timed their upgrades so as to deter potential entry by cities with municipal electric utilities.  On average, incumbent firms upgraded their systems 11% to 23% faster when the city owned a municipal utility.  The result is robust to a number of alternative explanations; in particular, the effect disappears when a state passes a law restricting the city's ability to build and operate a cable TV system.  I also show that the incumbent firm's response to potential entry by the city was greater than the response to potential entry by a private firm.  The different responses may result from the incumbent being in multi-market contact with the private entrant whereas the incumbent is in single market contact with the public (city) entrant.  Reputation created in a multi-market setting may act to deter potential private entrants.  These results should be of interest to firms that operate in regulated industries or in markets with potential or actual state-owned competitors such as those in China and the EU.