Managerial Economics

Time Warner : 

Time Warner Cable Pricing, District 6SW Team 4 Vishal Bedi Valencia Engermann James Hunt Bryan Oliver Olga Sánchez

Background on Cable Bundled Services : 

Background on Cable Bundled Services District 6SW, 110,000 Households Two cable providers – Time Warner, Competitor Competitor charges $84.95 Time Warner charges $93.45 (10% premium) Time Warner costs are $40.10 per subscriber Rumored that Competitor will increase price by 10% What should Time Warner do?

Time Warner Current State Analysis : 

Time Warner Current State Analysis 60% Market Share 66,000 Customers $93.45 price per Customer $40.1 cost per Customer Total Revenue = $6,167,370 Total Costs = $2,646,600 Profit = $3,520,770

Time Warner Market Share Analysis : 

Time Warner Market Share Analysis 110,000 Households

Competitor Keeps Price the Same : 

Competitor Keeps Price the Same Market Share Profits Market Share Profits Favorable option

Competitor Increases Price By 10% : 

Competitor Increases Price By 10% Market Share Profits Market Share Profits Favorable option Market Share Profits

Time Warner Price Elasticity Analysis : 

Time Warner Price Elasticity Analysis Price Elasticity of Demand = .05/.1 = .5 Demand for cable is inelastic Cross-Price Elasticity between Time and the Competitor = (65%-60%)/(10%) = .5 Thus, the products are substitutes Why can we raise prices?

Time Warner Price Elasticity Analysis : 

Time Warner Price Elasticity Analysis The average American is our target customer. This Guy will Pay anything!!!! Customers Save on Child Care!!!! Its Fun for the Whole Family!!

Regulatory Considerations : 

Regulatory Considerations Since deregulation, cable providers have increased prices 2 to 3 times faster then the rate of inflation Some site this as evidence of a monopoly because they raise prices without losing customers Some consumer groups are pushing for re-regulation of cable rates Why shouldn’t we raise prices?

Regulatory Considerations : 

Regulatory Considerations Uncle Sam protects consumers , sometimes

Recommendations : 

Recommendations We should retain the current bargain price of $93.45 If the competitor does not increase price, Time Warner retains existing market share (60%) and profits ($3.5M) If the competitor increases price by 10%, Time Warner market share increases from 60% to 65%, and profit increases from $3.5M to $3.8M Subscription revenue is already on the rise, so there’s no sense in starting a price war We’ve got a good thing going, so let’s not get too hasty and flag our market for regulation Essentially, business as usual

That’s all folks! : 

That’s all folks!