Scenario 15-3
Black Box Cable TV is able to purchase an exclusive right to sell a premium movie channel (PMC) in its market area. Let's assume that Black Box Cable pays $150,000 a year for the exclusive marketing rights to PMC. Since Black Box has already installed cable to all of the homes in its market area, the marginal cost of delivering PMC to subscribers is zero. The manager of Black Box needs to know what price to charge for the PMC service to maximize her profit. Before setting price, she hires an economist to estimate demand for the PMC service. The economist discovers that there are two types of subscribers who value premium movie channels. First are the 4,000 die-hard TV viewers who will pay as much as $150 a year for the new PMC premium channel. Second, the PMC channel will appeal to about 20,000 occasional TV viewers who will pay as much as $20 a year for a subscription to PMC.
-Refer to Scenario 15-3.If Black Box Cable TV is unable to price discriminate,what price will it choose to maximize its profit,and what is the amount of the profit?

Question

Quizplus · Accepted Answer

Since Black Box Cable TV is unable to price discriminate, it can only charge one price for the PMC service. To maximize profit, they should charge the highest price that the market will bear. In this case, the die-hard TV viewers are willing to pay up to $150 for the PMC service, so Black Box should charge that price. The total revenue from those 4,000 customers would be $600,000 ($150 x 4,000), which would more than cover the cost of the exclusive marketing rights to PMC. The fact that there are 20,000 occasional TV viewers who are only willing to pay $20 for PMC is irrelevant since they would not subscribe at the higher price anyway. Therefore, the profit would be $450,000 after deducting the cost of exclusive marketing rights ($600,000 in revenue - $150,000 cost).

Scenario 15-3 Black Box Cable TV Is Able to Purchase an Exclusive