We analyze two imperfectly competitive firms’ equilibrium pricing and channel-selecting behavior in a cable TV industry. Two segments of consumers are assumed. The loyal consumers are interested in one particular channel and attach zero value to other channels. The variety-seekers attach a positive value for each and every channel, and the value they attach to a bundle of channels is strictly higher than the sum of values they attach to individual channels; i.e. their preferences exhibit “variety benefits.” The following results are obtained. First, firms compete more aggressively in equilibrium when there are more variety-seekers or when the variety benefits are higher. Second, the equilibrium prices are independent of consumers’ valuations for commonly offered channels. Third, surprisingly, an increase in consumers’ valuation for a particular channel may prompt the firms to drop the channel from their equilibrium bundles. Fourth, when the variety benefits are high enough, neither maximum nor minimum differentiation in the firms’ channel bundles is possible. Finally, the competitive structure of the cable industry tends to be more concentrated when there are more variety-seekers.
