Question

The 2014 announcement that Time Warner Cable and Comcast intended to merge prompted questions of monopoly because the combined company would supply cable access to an overwhelming majority of Americans. It also raised questions of monopsony since the combined company would be virtually the only purchaser of programming for broadcast shows. Assume the merger occurs: in each of the following, determine whether it is evidence of monopoly, monopsony, or neither. a. The monthly cable fee for consumers increases significantly more than the increase in the cost of producing and delivering programs over cable. b. Companies that advertise on cable TV find that they must pay higher rates for advertising. c. Companies that produce broadcast shows find they must produce more shows for the same amount they were paid before. d. Consumers find that there are more shows available for the same monthly cable fee.

Short answer

a. The monthly cable fee for consumers increases significantly more than the increase in the cost of producing and delivering programs over cable. b. Companies that advertise on cable TV find that they must pay higher rates for advertising. c. Companies that produce broadcast shows must produce more shows for the same amount they were paid before. d. Consumers find that there are more shows available for the same monthly cable fee. Answer: a. Monopoly b. Monopoly c. Monopsony d. Neither

Step-by-step solution

a.

The monthly cable fee for consumers increases significantly more than the increase in the cost of producing and delivering programs over cable. This suggests that the merged company is using its market power to set prices higher than it would be under a competitive market situation, thus demonstrating evidence of a monopoly.

b.

Companies that advertise on cable TV find that they must pay higher rates for advertising. This scenario suggests that the merged company is using its market power to increase prices for advertising, which is a common behavior for companies with monopoly power. So, this scenario shows evidence of monopoly.

c.

Companies that produce broadcast shows must produce more shows for the same amount they were paid before. This suggests that the merged company is using its position as the sole purchaser of programming to drive down prices for producers, creating evidence of a monopsony.

d.

Consumers find that there are more shows available for the same monthly cable fee. This scenario doesn't directly indicate that the merged company is abusing its market power, whether as a monopoly or monopsony. More shows available for the same monthly fee could be due to factors like increased production efficiency or a more competitive market. Therefore, this case presents evidence of neither monopoly nor monopsony.

Key concepts

Monopsony

In economic theory, a monopsony is a market structure in which there is only one buyer facing many sellers. This gives the buyer considerable power to dictate terms. When Time Warner Cable and Comcast considered merging, one concern was that they would become a dominant buyer in the market for TV programs. For instance, with only one major company purchasing broadcast shows, producers might have to sell more shows while earning the same amount as before.
This scenario exemplifies a monopsony, where the buyer drives prices lower, affecting the producer's revenue:

• The seller, in this case, the TV program producer, has less bargaining power.
• The buyer can influence pricing and production terms.
• Producers might have to increase their output without receiving additional payment.

A monopsony isn't always harmful, but it can reduce the incentives for producers to innovate since their profits are squeezed by the single purchaser's market power.

Market Power

Market power refers to a company's ability to raise prices without losing all its customers. In a monopoly, where a single company dominates the market, this power is significant. If Time Warner Cable and Comcast merged, they would wield a substantial amount of market power in the cable TV market.
The exercise scenarios illustrate how market power is utilized:

• Consumers face higher monthly cable fees, exceeding the increase in program production costs.
• Advertisers encounter increased rates for cable advertising spots.

In both situations, the merged company uses its market power to increase prices, showcasing monopoly characteristics. Market power allows companies to set prices above a competitive level because alternatives for consumers and advertisers are limited.

Cable Television

Cable television systems deliver TV programs to consumers, traditionally through coaxial cables. They offer various channels and are often bundled with internet services. The merger between Time Warner Cable and Comcast highlighted the risks of reduced consumer choices.
A unique aspect of cable television is its reliance on physical infrastructure, which is costly and difficult for new entrants to replicate. This creates a natural monopoly in many areas:

• The significant barrier to entry prevents new competitors.
• Merged entities could dominate regional markets, reducing diversification.
• Content pricing heavily influences subscription costs.

Such dominance can lead to higher fees and limited channel selection for consumers, unless proper regulations are in place to ensure competitive practices and consumer protection.

Advertising Rates

Advertising rates are the charges that companies pay to broadcast their ads on TV. Typically influenced by viewer demographics, time slots, and channel popularity, these rates can be volatile. When cable companies merge, their combined market power can substantially increase these rates.
Here's how advertising rates are affected by cable monopolies:

• Fewer cable providers mean less competition among advertising channels.
• Cable companies can leverage their vast viewer base to charge premium rates.
• Higher advertising rates may lead to increased product costs, which are passed on to consumers.

It is crucial for advertisers to seek diverse platforms or negotiate effectively to mitigate the impact of increased advertising costs, which underscores the importance of competitive vigilance in the industry.