A number of groups have put pressure on the FCC to mandate that cable companies
ID: 1119516 • Letter: A
Question
A number of groups have put pressure on the FCC to mandate that cable companies offer their channels à la carte rather than in bundles. We are opposed to this measure and will continue to strive to provide channels in bundled tiers. However, we want to be prepared in case we need to offer single-channel pricing. Using existing market research, we were able to calculate an estimated own-price elasticity of demand for a number of our most popular cable channels. Use this information, along with the marginal cost for each channel, to calculate the profit-maximizing price for each of these channels.
Programming Cost per Subscriber per Month, Estimated Own Price Elasticity of Demand, Subscription Price
ESPN $6.15 –1.8
TNT $1.52 –2.1
Disney Channel $1.25 –1.6
Fox News $1.05 –1.9
MSNBC $0.99 –2.4
CNN $0.87 –3.4
Explanation / Answer
Lerner Index (LI) = -1 / Own price elasticity of demand
Again, LI = (P - MC) / P
(1) ESPN
LI = -1 / -1.8 = 0.56
0.56 = (P - 6.15) / P
0.56P = P - 6.15
0.44P = 6.15
P = $13.98
(2) TNT
LI = -1 / -2.1 = 0.48
0.48 = (P - 1.52) / P
0.48P = P - 1.52
0.52P = 1.52
P = $2.92
(3) Disney
LI = -1 / -1.6 = 0.625
0.625 = (P - 1.25) / P
0.625P = P - 1.25
0.375P = 1.25
P = $3.33
(4) Fox News
LI = -1 / -1.9 = 0.53
0.53 = (P - 1.05) / P
0.53P = P - 1.05
0.47P = 1.05
P = $2.23
(5) MSNBC
LI = -1 / -2.4 = 0.42
0.42 = (P - 0.99) / P
0.42P = P - 0.99
0.58P = 0.99
P = $1.71
(6) CNN
LI = -1 / -3.4 = 0.29
0.29 = (P - 0.87) / P
0.29P = P - 0.87
0.71P = 0.87
P = $1.23
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.