Twenty years ago, cable tv companies typically exhibited the following character

Question

Twenty years ago, cable tv companies typically exhibited the following characteristics:

a)   They were granted the exclusive right to provide cable service to customers in a particular city; i.e. it was impossible for Comcast and Optimum to both offer cable service to Los Angeles customers. The companies determined the prices they would charge those customers.

b)   For this legal permission the companies had to pay a franchise fee to the city in which they operated usually a particular percentage (set by the city) of gross revenue.

c)   The companies hired different types of employees: accountants, HR managers, office staff, etc. whose skills were transferrable to other firms, occupations, and industries; and technicians, electricians, and programmers whose skills were not easily transferrable to other firms, occupations, or industries.

d)   The companies purchased land from available plots in the city, and purchased capital equipment some of which, again, was transferable to other firms (computers, desks), and some of which was not (equipment specifically designed for cable provision).

For each of the four categories above (customer price, city fee, wages for each type of employee, land price, price for each type of capital), describe how much market power the individual cable company would have in setting the price. Compare the market power of cable tv companies today versus twenty years ago in terms of their ability to set the cable service price for customers. What developments, if any, have occurred that alter the amount of market power an individual cable tv company has?

Explanation / Answer

a. when an organization is provided with an exclusive right to provide service in a specific market, then the power of the company in terms of money, performance, price etc will be high. Since no other service provider can perform business over there, the competition will be less and this company can set price according to its willingness.

b. the city fee or the price for the franchise can be decided by the cable TV. The price set would be relatively higher so that they can hold their market power.

c. through hiring highly skilled employees the power of the company increases through which the service quality also increases.

d. the companies which purchases sophisticated equipments can gain more market power

When compared to the companies twenty years ago, the efficeny and power of the present cable TV is higher. This is due to the availability of highly talented staff members and sophisticated equipments.

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