Estimating Product Characteristics and Spatial Competition in the Network Television Industry

Abstract

Assessing the demand for products with characteristics that are unobservable or difficult to measure is becoming increasingly important with the growing proliferation and value of such products. Analyzing industry performance and firm competition in these sectors is hindered by the failure of traditional empirical methods to estimate demand for the products of these sectors. This paper focuses on the network television industry to present: (a) an empirical analysis of spatial competition, and (b) a structural approach to estimating product characteristics and consumer preferences in such industries, and (c) optimal network programming and scheduling given the estimated demand system. We use maximum simulated likelihood to estimate a structural model of viewer choice, yielding estimates of the latent characteristics of each show, the distribution of consumers' preferences for these characteristics, and the state dependence of choices. Results indicate the attribute space spans four dimensions of horizontal differentiation and one vertically differentiated dimension. Interpretations of these dimensions reflect the traditional show labels. For example, one of the dimensions represents the degree of realism in a show. Furthermore, the clustering of shows based on the estimated characteristics corresponds to traditional show labels. We identify four clusters --- sitcoms for mature viewers, sitcoms for younger viewers, reality based dramas, and fictional dramas. Regarding strategic behavior, our model suggests the networks should use counter-programming (i.e., differentiated products) within each time slot and homogeneous programming through each night. The estimated show locations reveal an extensive use of these strategies, as well as a limited degree of branding. Nonetheless, by unilaterally changing their schedules to increase both counter-programming and homogeneity, ABC, CBS, and NBC are able to increase their weekly ratings by 16%, 12%, and 15%, respectively. In a Nash equilibrium of the static scheduling game, these gains are reduced to 15%, 6%, and 12% increases.