ANALYZING MANAGERIAL DECISIONS: Personal Video Recorders Cable companies now off
ID: 1136361 • Letter: A
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ANALYZING MANAGERIAL DECISIONS: Personal Video Recorders Cable companies now offer a combined box and PVR in one unit for a small additional monthly charge. This further simplifies setup operation, and the user gets a single bill. 1. cable Personal video recorders (PVRs) are digital video recorders used to record and replay television programs received from cable, satellite, or local broadcasts. But unlike VCRs, which they replace, PVRs offer many more functions, notably the abil- ity to record up to 3,000 hours of programs and easy programming. A PVR consists of an internal hard disk and microprocessor. After the owner in stalls the hardware, the PVR downloads all upcom ing TV schedules to the hardware via a phone or cable connection. Users merely enter the name of the show(s) they want recorded and the system finds the time and channel of the show and automatically records it. Users must subscribe to a cable or satellite system if they wish to record programs off these channels Discuss how PVRs will affect the demand from advertisers? 2. Suppose you are in charge of setting the price for commercial advertisements shown Enemies, a top network television show. Ther is a 60-minute slot for the show. However, the running time for the show itself is only 30 min utes. The rest of the time can be sold to other companies to advertise their products or do- nated for public service announcements. De mand for advertising is given by 30-0.0002P+ 26V Besides ease of programming and much larger recording capacity than videotape, PVRs allow the user to watch a prerecorded show while the unit is recording up to five new programs, pause watching live programs (e.g., if the phone rings) and then re- sume watching the rest of the live broadcast, view instant replays and slow motion of live and skip commercials. In effect, PVRs, like older VCRs, allow viewers to control when they watch broadcast programs (called "time shifting"). How where Qu quantity demanded for advertising on the show (minutes). P- the price per minute that you charge for advertising, and V is the number of viewers expected to watch the advertisements (in millions) a. All your costs are fixed and your goal is to maximize the total revenue received from selling advertising. Suppose that the ex pected number of viewers is one million r, PVRs provide much sharper pictures and are much simpler to operate than VCRs, and PVRs allow the user to download the television schedule for the next week. people. What price should you charge How many minutes of advertising will you sell? What is total revenue Suppose price is held constant at the valuc from part (a). What will happen to the Two companies that begin selling PVRs and subscription services were: TiVo and ReplayTV Both firms started in 1997. As of 2013 TiVo had about one million subscribers and ReplayTV had been purchased by DirectTV. Companies are devel- oping new technologies that make it even easier for users to "snip" commercials quantity demanded if due to PVRs the num ber of expected viewers falls to 0.5 million. Calculate the "viewer el the two alue means. on points. Explain in words what thisExplanation / Answer
Q1. As the PVR sales will go up the demand from advertisers will come down. This is due to the fact that people who can record the serials will skip the commercials. Whereas the advertisers earn from the viewership of the advertisements and not the viewership of the show in which they are advertised.
Thus there seems to be an inverse relationship between the sell of PVR and the demand for advertising. If people will use pvr and will skip commercials than advertising will be of no use for the companies.
Q2.
As per the law of demand, as quantity produced increases, its price falls and vice-versa.
As we want the revenue maximization, we bring in the concept of marginal revenue. As for maximization MR=0
From the demand curve we have: Qd = 30 – 0.0002P + 26 V
Taking out the value of P from here and substituting the value of V, the number of viewers which is 1 million.
P = 280,000 – 5000Qd
We know that the MR has the same intercept as the Price equation but the slope is doubled, therefore:
MR = 280,000 – 10000Qd
For revenue Maximization: MR = 0
Qd = 28 minutes
The Price at which the 28 minutes will be charged is: 140,000 million/minute. Since TR = Qd * P
TR = 3920, 000
b.
Keeping price P constant:
Qd = 30 – (0.0002*140,000) + 26 (0.5) = 15
The equilibrium quantity has changed to 15 from 28 when the volume changed to 0.5 million from 1 million. Hence,
Q1 = 28, V1 = 1
Q2 = 15, V2 = 0.5
The elasticity is percentage change in the demand / percentage change in the viewers. Therefore elasticity becomes: 0.91.
Therefore we can say that 1% increase or decrease in the viewers will cause 0.91% increase or decrease in the Quantity demanded.
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