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Chapter 15: Problem 9

When homebuilders construct a new housing development, they usually sell to a single cable television company the rights to lay cable. As a result, anyone buying a home in that development is not able to choose between competing cable companies. Some cities have begun to ban such exclusive agreements. Williams Township, Pennsylvania, decided to allow any cable company to lay cable in the utility trenches of new housing developments. The head of the township board of supervisors argued: "What I would like to see and do is give the consumers a choice. If there's no choice, then the price [of cable] is at the whim of the provider." In a situation in which the consumers in a housing development have only one cable company available, is the price really at the whim of the company? Would a company in this situation be likely to charge, say, \(\$ 500\) per month for basic cable services? Briefly explain.

Short Answer

Expert verified
In a monopolistic situation, while the cable company can technically set the price at their whim, they still need to consider what customers are willing to pay for their services. Hence, they aren't likely to charge an extremely high fee like \$500 per month for basic cable services as consumers would rather opt for alternatives. On the other hand, competition, as instituted by Williams Township, can keep prices in check and give consumers more choice.

Step by step solution

01

Concept of Monopolies

Understand that a monopolistic market structure is one where a single company supplies the entire market. With no competition and full control, it can set any price. However, just because a firm possesses monopoly power, it doesn't mean it can set an extravagant price like \$500 per month.
02

The Price Setting

Even if a monopolistic company technically can set the price at whatever it wants, the price still has to be reasonable. While the price is somewhat at the whim of the company, it's also dependent on what consumers are willing and able to pay. Suppose they set the price at \$500, which is too high for most consumers. In that case, they would either opt out of the service or look for alternatives, like satellite dish services. This, in turn, would reduce the monopolist's customer base and revenue.
03

Competitive Market Effect

A competitive market situation exists when any cable company can lay its lines, adding competition. Now, companies can no longer price at their whim as they need to stay competitive to secure customers. Lowering prices or providing greater value for the same price are common strategies in competitive markets.

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Most popular questions from this chapter

Does a monopolist have a supply curve? Briefly explain. (Hint: Look again at the definition of a supply curve in Chapter 3 on page 83 and consider whether this definition applies to a monopolist.)

In a magazine article, a writer explained that the provision of electric power in the United States consists of two processes: the generation of electricity and the distribution of electricity. The writer argued that "power distribution is a natural monopoly.... But ... there's \(\ldots\) no reason why the people who generate the electricity \(\ldots\) should be the same people who own the power lines." a. Why would the distribution of electric power be a natural monopoly? b. Why would the generation of electric power not be a natural monopoly?

What is the difference between a horizontal merger and a vertical merger? Which type of merger is more likely to increase the market power of a newly merged firm?

Why would it be economically efficient to require a natural monopoly to charge a price equal to marginal cost? Why do most regulatory agencies require natural monopolies to charge a price equal to average cost instead?

What is the relationship between a monopolist's demand curve and the market demand curve? What is the relationship between a monopolist's demand curve and its marginal revenue curve?
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