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Merger modeling

The FCC just might get radical with the cable industry. Under orders from federal judges, the FCC is rethinking the traditional way it prevents one company from dominating the pay-TV business, which has been to impose a set limit on any company's size and reach. One idea getting scrutiny is the in-vogue field known as "experimental economics."

TV professionals might scoff that nothing from the dismal science will ever be in vogue, but experimental economics is fast gaining fans among academics. The aim of experimental economists is to explain seemingly irrational real-life market decisions that often defy expectations assumed by classical economists under perfect conditions.

The local-delivery monopolies and programming oligopolies that make up the cable industry are ripe ground for this type of study, say industry observers.

The FCC is currently working on an experimental model that can predict the marketplace impact of a cable-industry merger. Presumably, the model could be used to help the agency judge future mergers on a case-by-case basis if it dumps for good the 30% cap on one company's share of multichannel subscribers as a commission proposal suggests.

"This would allow us to model the impact of a merger rather than theorize," FCC Cable Services Bureau Chief Ken Ferree told reporters earlier this month. He wouldn't say what factors the economic formula would take into account but said he hopes to have a version ready for public comment by February.

FCC Chairman Michael Powell has already said he may replace the 30% limit on one company's share of pay-TV subscribers with a "safe harbor" that would allow most deals to go through unchallenged unless government economists determined that the merged company would have power to affect the prices of programming networks and competing video distributors.

Th FCC also is examining some traditional models of marketplace power, including the Herfindahl-Hirschman Index, which estimates how changes in market share affect overall concentration in an industry.

Experimental economics goes one step further by drawing conclusions based on "game theory," the study of how businesses make decisions in the face of many options and factors outside their control. Rather than deriving theories from data culled from the economy at large, experimental economists mimic physical scientists by conducting controlled experiments on small groups.

Players on both sides of the ownership-limits war see the effort as positive.

The National Cable and Telecommunications Association, which has generally favored case-by-case merger reviews rather than set ownership limits, is encouraged by the FCC's apparent effort to take an approach similar to antitrust regulators' at the Justice Department and FTC.

Media Access President Andrew Schwartzman says he opposes models as a replacement for set ownership limits but is fine with a tool that could provide an extra layer of merger analysis. "They're looking for additional ammunition, and that's OK," he said. MAP has asked the U.S. Supreme Court to uphold the 30% cap, which was thrown out by lower-court judges in March.