1/29/2021 [Solved] Chapter CTMC, Problem Memo10 - Managerial Economics & Business Strategy (9th Edition)

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Chapter CTMC, End of Chapter, Case-Based Exercises, Exercise Memo10

Here is the step-by-step explanation, veri ed by an educator:

Step 1 of 3

The retransmission fee of $1.25 per month demanded by the network a liate causes a rise in the TWC's cost per subscriber by
0.25. The increase in the total cost per month incurred by TWC is determined as the product of the number of subscribers and
the per subscriber increase in the fee.

Rise in total cost= Number of subscribers ×rise in transmission fee

= 810, 000 × $0.25

= $202, 500

Step 2 of 3

A proper estimate is made to check if not accepting the deal and thus losing the subscribers causes the pro ts to fall by
$202,500 or not. It is assumed that 5% of the customers are lost in the rst month, which equals 40,500 subscribers.
The required pro t margin per subscriber for being indi erent between accepting the deal or rejecting the deal is determined as
the ratio of the amount of rise in cost and subscribers lost.

202, 500
Required profit margin per subscriber =
40, 500
= $5

Step 3 of 3

Although the pro t margin per subscriber is not provided, the deal should be accepted as long as it is more than $5.
However, the deal should still be negotiated, given the fact that TWC accounts for more than 50% of the network programming.
The network a liate will also be aware of this fact and will, therefore, be willing to come to a deal. This implies that both the sides
will be better o if the deal is made.
The negotiating strategy will be to commit to paying only $1.05 and not accepting the higher fee of $1.25. Since both the parties
are better o by making the deal rather than rejecting it, the network a liate will be willing to accept the price of $1.05. However,
making such a commitment is di cult as the rm bene ts by accepting the price of $1.25 too.
Even if the deal is made, the marginal costs of the TWC are certain to rise. Increase in the marginal cost will get translated into
higher prices charged. 

Final answer 숥

The deal should be made if the rm is earning a pro t margin per subscriber that is greater than $5.
Even if the rm is better-o accepting the deal at $1.25, it should negotiate the deal, provided that it accounts for more than
50% of the market share. The rm should make a commitment of not accepting any price above $1.05.
Provided that both parties are better o by making a deal, the network a liate will also be willing to come to the deal and o er
a price lower than $1.25.

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1/29/2021 [Solved] Chapter CTMC, Problem Memo10 - Managerial Economics & Business Strategy (9th Edition)

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쇲 CBM, Ex Memo9 CBM, Ex Memo11 쇰

Textbook Solutions / Managerial Economics & Business Strategy / Ch CTMC, End of Chapter, Ex Memo10

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