Before their merger, XM and Sirius were competing sellers in the U.S. satellite radio market. The U.S. Department of Justice allowed the merger even though it created a single seller in the market. Why might we expect this merger to have limited impact on U.S. consumers?
A) There are many close substitutes for satellite radio service (e.g., free AM-FM radio, internet radio)
B) The merged firm is likely to act on behalf of its customers and keep its prices and profits low
C) U.S. consumers are known to have perfectly inelastic demand for satellite radio (i.e., they are unresponsive to price changes)
D) all of the above are correct

Question

Quizplus · Accepted Answer

There are many close substitutes for satellite radio service (e.g., free AM-FM radio, internet radio), so the merger is unlikely to have a significant impact on U.S. consumers. The merged firm may choose to keep prices and profits low in order to remain competitive with these substitutes, but even if they do not, consumers have other options to choose from. Demand for satellite radio is also likely to be elastic, meaning that consumers are somewhat responsive to price changes.

Before Their Merger, XM and Sirius Were Competing Sellers in the U.S