Effects of capacity constraints on bundling and investment decisions
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This paper develops a model that describes the incentive structure of cable and internet providers acting as geographic monopolists. The model demonstrates that for service providers facing capacity constraints, marginal returns from capacity expansion decrease as technology improves, in part explaining a reluctance on the part of providers to invest in additional data capacity. This paper further shows that bundling television and internet is not always an optimal strategy given the substitutability of the two products and the capacity constraint faced by the provider.