Managerial Economics - Market Structures

Managerial Economics Final Project

MBA601

Market Structures

Monopoly

A monopoly consists of one player in the market. There are near insurmountable barriers to entry for other possible competitors. This gives the existing player the ultimate advantage. In a monopoly, price information is irrelevant since there is only on company producing the product.

In a monopoly, the sole company can raise or lower prices as they wish due to the lack of competition.

Oligopoly

In an oligopoly, there are a few sellers of a product. The barriers to entry are high, but not impossible. Existing companies within the oligopoly still have a strong advantage due to the general lack of competition. However, is one firm within the oligopoly takes drastic action (perhaps lowering prices or introducing a new service), it will have a significant impact on the other firms and will force them to react.

Description of the Producers

Cable Television-Summary

Cable companies provide television service to households across the nation. In recent years, more and more companies have also added internet and phone packages in addition to their cable offerings. This is an attempt to keep so-called ‘cord cutting’ customers, which are customers who have eliminated traditional cable services and switched to online-only offerings like Netflix and Hulu.

Cable Television - Why It’s a Monopoly

At first glance it might not look like the cable industry is a monopoly. Given it’s top-heavy claim of customers, it looks more like an oligopoly with a few major players. However if we drill down to the local level, we see that those companies are often the only option those areas have for cable television, and that’s what gives these cable companies a monopoly status. Based on a 2009 survey, the FCC documented effective competition or a second wireline operator for only 31.65% of subscribers (Bagchi, 2013).

Cable companies have a similar structure to electrical companies across the country, where there are many companies throughout the nation, but each one has a strangle hold in the area in which they operate.

Cable Television - Number of Firms

There are over 475 cable companies in the U.S. However, most of those are very small companies that are available to only a fraction of the U.S. population. Out of those 475 companies, the top 5 cover 223 million people in the U.S., while the remaining 469 companies divide up the remaining 100 million people (List of Cable Broadband Providers).

Cable Television - Market Power

Cable Television has very strong market power. Cable’s market power stems from a lack of effective competition. The largest cable operators never compete with one another. Instead they have grown to huge national firms through mergers using swaps of systems to create regional clusters that undermine the ability of overbuilders to launch competition. Large operators and clustered systems have more muscle to beat competition and impose price increases (The Continuing Abuse Of...).

Cable has also used sports to exert market power, especially sports with long seasons like baseball, basketball, and hockey. For example, if you live in San Francisco and are a fan of the Giants, Warriors, and Sharks, the only way you’re going to see the majority of their games is through the local cable package.

Cable Television - Barriers to Entry

Cable has extremely high barriers to entry. Permits have to be acquired which can have a long wait time. A network that is available to 100% of the customers in the area has to be built. However being the new company, they may only capture 10%-20% of that market and they have to lure them in with bundle offers that they will likely take a loss for. Even then, established cable companies will probably low-ball that bundle offer in order to keep their customer (Honan, 2011).

Cable Television - Pricing Strategy

Cable television uses numerous pricing strategies. They usually offer “bundle” packages that include other service along with a cable subscription, like internet service or home phone. Most also offer promotional pricing, where their service will be a promotional rate for a fixed amount of time, and then be raised to it’s “normal” pricing afterwards.

In addition, cable companies have been known to add several fees that will hike the price of their package beyond their advertised price, including set-top box rental and router fees (Koblin, 2015).

Cable Television - Profit

Cable operators revenues were $108 billion in 2016, and is forecasted to hit $117 billion in 2026 (Spangler, 2016). However, internet packages are quickly catching up to cable in revenue generation (which is why many cable companies now bundle internet with cable).

In the left-hand chart below (Seward, 2015), we see that television subscriptions have been falling as internet subscriptions have risen. It is speculated that this trend will continue as millennials continue to replace baby boomers as cable customers

And the right-hand chart (Seward, 2015) shows that while the price of television has remained relatively stable, the price of internet has risen.

Finally, the chart below (Bryan, 2015) shows the profits of video subscribers for the top four cable companies in the U.S. - Comcast, Time Warner, Charter, and Cablevision. As we can see, the programming costs will continue to rise, which will see the margin percentage decline year-over-year.

Cable Television - Product Characteristics

Cable packages are often sold in bundles with internet, home phone, or other products (Comcast offers home security, for example) although people can order any of the products as a stand alone service as well. The price on the products vary depending on factors such as the number of channels (cable), the amount of bandwidth (internet), etc.

Cable companies will also rent out equipment as another means of revenue. Items like cable boxes, HD receivers, DVR’s,