Regulation of Program Licensing Fee in Korean CATV Industry: Is it Welfare-Improving?

Financial difficulties of small program networks and poor program quality have led the Korea Communication Commission (KCC) to introduce a regulation mandating cable operators to pay at least 25% of their subscription revenues to cable networks. With this regulation, KCC intended to provide program networks incentives to deliver high quality programs and develop the cable TV industry. However, this regulation was introduced without a formal analysis of the optimality of market equilibrium or the effects of the regulation on the industry or social welfare. This paper sets up a simple model focusing on the two-sided market nature of CATV industry. It is shown that the market equilibrium is generally suboptimal and program quality is below the socially optimal level. When the market equilibrium is suboptimal, the regulation of the licensing fee can improve program quality and social welfare, but cannot achieve the socially optimal equilibrium.