Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 17

A few years ago, the Federal Communications Commission (FCC) eliminated a rule that required Baby Bells to provide rivals access and discounted rates to current broadband facilities and other networks they may build in the future. Providers of digital subscriber lines (DSL) that use the local phone loop are particularly affected. Some argue that the agreement will likely raise many DSL providers' costs and reduce competition. Providers of high-speed Internet services utilizing cable, satellite, or wireless technologies will not be directly affected, since such providers are not bound by the same facilities-sharing requirements as firms using the local phone networks. In light of the FCC ruling, suppose that News Corp., which controls the United States' largest satellite-to-TV broadcaster, is contemplating launching a Spaceway satellite that could provide highspeed Internet service. Prior to launching the Spaceway satellite, suppose that News Corp. used least squares to estimate the regression line of demand for satellite Internet services. The best-fitting results indicate that demand is
is the price of satellite Internet service, P DSL is the price of DSL Internet service, and FCC's ruling the price of DSL, P DSL, is $25 per month and the monthly price of high-speed cable Internet, P cable , is $50. Furthermore, News Corp. has identified that its monthly revenues need to be at least $15 million to cover its monthly costs. If News Corp. set its monthly subscription price for satellite Internet service at $55, would its revenue be sufficiently high to cover its cost? Is it possible for News Corp. to cover its cost given the current demand function? Justify your answer.