Question

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

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

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.

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.

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.

Key concepts

Cable Television Market

The cable television market can be a unique environment, especially when considered in the context of a new housing development. Typically, these markets can be dominated by single companies due to exclusive agreements with homebuilders. When one company is granted the sole right to provide cable services, it creates a monopoly. This means that homeowners have no alternative providers from which to choose, allowing the cable provider significant control over pricing.

However, it is essential to understand that market conditions are changing. Some cities, like Williams Township, are beginning to challenge these monopolies by banning exclusive agreements and allowing multiple providers to offer their services. This shift encourages more competition in the cable television market, potentially benefiting consumers through more options and better pricing.

With more companies allowed to lay cable in the same area, the market becomes more competitive, potentially leading to lower prices and higher quality services for consumers.

Consumer Choice

Consumer choice is a crucial component of any healthy market. When consumers have the freedom to choose between multiple service providers, they have the power to select the option that best meets their needs.

In the context of the cable market, consumer choice impacts the pricing strategies of companies. If consumers are dissatisfied with the prices or quality offered by one cable provider, they can switch to another if there are multiple companies available in the area.

This freedom can encourage companies to compete based on price, quality, and service offerings, ultimately leading to better satisfaction for the customer. Without consumer choice, a monopolistic provider has little incentive to lower prices or improve service quality, as customers have no alternative providers.

The movement in Williams Township to allow multiple providers serves as an excellent example of encouraging consumer choice and reducing the potential of monopoly power by opening the market to competition.

Price Competition

Price competition emerges when multiple companies operate in the same market and aim to attract the same group of consumers. In a competitive market, businesses may lower prices to entice customers, ensuring that they remain attractive compared to other options.

In terms of cable services, price competition can create a better environment for consumers by offering various price points and packages to meet different needs and budgets. Companies may also introduce promotional offers, discounts, or bundling options to draw in more customers.

Moreover, price competition can drive innovation, where companies develop new services or improve existing ones to maintain or grow their market share. This can lead to enhanced service quality, expanded channel offerings, and technological advancements, all benefiting the consumer.

Overall, when companies compete based on price, it can lead to a healthier market environment where consumers enjoy better value for their money and a broader array of choices.