GROUP ASSIGNMENT COVER SHEET

STUDENT DETAILS

Student name: Nguyễn Trương Bảo Ngọc Student ID number: 22003024

Student name: Võ Nhựt Tân Student ID number: 22002211

Student name: Nguyễn Hoàng Nhi Student ID number: 22003086

Student name: Nguyễn Thị Châu Như Student ID number: 22002976

Student name: Đặng Quỳnh Như Student ID number: 22003243

Student name: Nguyễn Quang Tấn Phúc Student ID number: 22002997

UNIT AND TUTORIAL DETAILS

Unit name: Managerial Economics Unit number: ECO201

Tutorial/Lecture: Class day and time: Wed 8 A.M - 11:15 A.M
Lecturer or Tutor name: Dr. Pham Dinh Long
ASSIGNMENT DETAILS

Title: Simulation’s Reflective Report 4 - Group 8

Length: 1631 words Due date: 28/11/2023 Date submitted: 28/11/2023

DECLARATION

☑ I hold a copy of this assignment if the original is lost or damaged.

I hereby certify that no part of this assignment or product has been copied from any other student’s work or
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from the Lecturer / Tutor / Unit Coordinator for this unit.
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plagiarism checking).

Student’s signature: Ngọc

Student’s signature: Tân
Student’s signature: Nhi
Student’s signature: Như
Student’s signature: Như
Student’s signature: Phúc

Note: An examiner or lecturer / tutor has the right to not mark this assignment if the above declaration has not
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 ME-T12324PWB-1_Group 8_Reflective Report 4

TABLE OF CONTENT

INTRODUCTION..................................................................................................................2
BODY...................................................................................................................................... 3
MEMO 10...........................................................................................................................3
MEMO 11........................................................................................................................... 5
CONCLUSION.......................................................................................................................7
APPENDIX......................................................................................................................................... 8

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INTRODUCTION
In the dynamic landscape of the media industry, negotiating retransmission fees and addressing
regulatory pressures are crucial components of maintaining a competitive edge. Each memo in this
report highlights the importance of strategic decision-making, effective communication, and
understanding market dynamics to achieve mutually beneficial agreements and navigate industry
pressures successfully. They aim to focus on the pricing strategy in order to make the best decision
by using theory and given data from the market research and its rivals.

Specifically,

● Memo 10 provides a summary of the ongoing retransmission negotiation with a major

broadcast network affiliate on the West Coast. It aims to inform the Director of Content
Acquisition about the current status of the negotiation, including the demands made by the
network affiliate and counter-offer. Additionally, the memo seeks to outline the potential
financial impact of losing access to the network affiliate and proposes a negotiating strategy to
achieve a mutually beneficial resolution. The memo also anticipates the response of the affiliate
and highlights the importance of carefully evaluating the proposed fee increase. Overall, the
goal is to provide a comprehensive overview of the negotiation and guide the decision-making
process moving forward.
● Memo 11 is to address the pressure from various groups urging the Federal Communications
Commission (FCC) to mandate cable companies to offer channels à la carte instead of in
bundled tiers. The memo states the opposition to this measure and the intention to continue
providing channels in bundled tiers. However, it also acknowledges the need to be prepared for
the optimal pricing strategy in case single-channel pricing becomes necessary.

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BODY

MEMO 10
To: Director, Content Acquisition
From: Chief Operating Officer
Re: Retransmission Negotiation

We are in continued negotiations with one of the major broadcast network affiliates on the West
Coast over retransmission fees and have not been able to reach an agreement. The current
contract ends on August 31 of this year. The current retransmission fee is $1 per subscriber per
month.

The network affiliate is demanding $1.25 per month and has cited the fact that it has just picked
up rights to broadcast the NFL games for the local franchise. We have counter-offered $1.05 per
subscriber, but this was immediately rejected.

We currently have 810,000 cable subscribers in the affiliate’s market, which makes up about 52
percent of all households in the area. Other households have either cut the cord or are using a
competing service (DirecTV, Dish Network, or Verizon). All of our competitors in the market
have contracts with the network affiliate through the end of next year.

Based on past experience in other markets, our analysts estimate that losing access to the network
affiliate will cost us 3 percent of our customer base within the first week, and another 2 percent if
the dispute lasts a month. The network affiliate will lose some revenue as well since half of its
viewers will lose access to its programming.

Should we accept the $1.25 monthly fee? What should our negotiating strategy be, and how do
you anticipate the affiliate will respond?

There are certain advantages and disadvantages depending on whether we accept the deal or not.

If we accept the $1.25 monthly fee per subscriber:

Disadvantages:

We will pay an additional $0.25 per subscriber. With the current cable subscribers in the affiliate’s
market, the extra cost will be $202,500 per month and $2,430,000 per year.

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Advantages:

The network affiliate has just picked up rights to broadcast the NFL games for the local franchise,
which could potentially raise the value and extension of their service as well as ours.

On the other hand, if we reject the $1.25 retransmission fee per subscriber per month:

Disadvantages:

We will suffer an estimated loss of 5% of subscribers if the dispute lasts a month. As a result, there
will be a loss of 40,500 subscribers, which at $1 per subscriber per month, equates to a loss of
$486,000 per year.

Moreover, all our competitors in the market have contracts with the network affiliate through the
end of next year, which could potentially make our service less attractive to current and potential
subscribers.

Furthermore, the network affiliate will lose some revenue as well since half of its viewers will lose
access to its programming, which is a lose-lose situation for not only both companies but also
subscribers.

From the previous analysis, it seems like accepting the $1.25 monthly fee might be the lesser of two
evils, however, the additional fee is too high ($2,430,000 per year). Therefore, it would be better for
us to suggest a negotiation strategy with the network affiliate. There should be a
collaboration-based negotiation approach that creates win-win situations for both parties. It should
be any retransmission fee between $1.05 to $1.25 per subscriber. Ideally, it should end up at $1.15
per subscriber and it should happen without delay as customers will start switching to the other
substitutes.

In addition, because the network affiliate is taking advantage of the market conditions and
exercising market power, the company should identify other network affiliates to work with and
there should be multiple network affiliates in the contract. It will increase competition and
bargaining power will shift to the company.

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MEMO 11
To: Pricing Manager, Central State Region
From: Vice President, Marketing
Re: Strategic Pricing Decision

A number of groups have put pressure on the FCC to mandate that cable companies offer their
channels à la carte rather than in bundles. We are opposed to this measure and will continue to
strive to provide channels in bundled tiers. However, we want to be prepared in case we need to
offer single-channel pricing.

Using existing market research, we were able to calculate an estimated own-price elasticity of
demand for a number of our most popular cable channels. Use this information, along with the
marginal cost for each channel, to calculate the profit-maximizing price for each of these
channels.

Programming Cost Estimated Own

Subscription
Channel per Subscriber per Price Elasticity Lerner Index
Price
Month of Demand

ESPN $6.15 -1.8 0.56

TNT $1.52 -2.1 0.48

Disney $1.25 -1.6 0.63

Channel

Fox News $1.05 -1.9 0.53

MSNBC $0.99 -2.4 0.42

CNN $0.87 -3.4 0.29

The analysis is based on the concept of the Lerner Index (LI), which measures a firm's market
power or ability to set prices above marginal cost.

−1
- Lerner Index (LI) =
𝑂𝑤𝑛 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑

The LI for each channel has been calculated in the table above.

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(𝑃 − 𝑀𝐶)
On the other hand, LI =
𝑃
Based on the formula, The LI and profit-maximizing price for each channel are calculated in the
table provided.

Programming Estimated
Cost per Own Price Lerner Subscription
Channel Calculation
Subscriber per Elasticity of Index Price
Month Demand

ESPN $6.15 -1.8 0.56 13.98 0.56P = P - 6.15

0.44P = 6.15
P = $13.98

TNT $1.52 -2.1 0.48 2.92 0.48P = P - 1.52

0.52P = 1.52
P = $2.92

Disney $1.25 -1.6 0.63 3.33 0.625P = P - 1.25

Channel 0.375P = 1.25
P = $3.33

Fox News $1.05 -1.9 0.53 2.23 0.53P = P - 1.05

0.47P = 1.05
P = $2.23

MSNBC $0.99 -2.4 0.42 1.71 0.42P = P - 0.99

0.58P = 0.99
P = $1.71

CNN $0.87 -3.4 0.29 1.23 0.29P = P - 0.87

0.71P = 0.87
P = $1.23

● The LI for ESPN is 0.56, which means that the profit-maximizing price for ESPN is $13.98.
● The LI for TNT is 0.48, which means that the profit-maximizing price for TNT is $2.92.
● The LI for Disney Channel is 0.625, which means that the profit-maximizing price for
Disney Channel is $3.33.
● The LI for Fox News is 0.53, which means that the profit-maximizing price for Fox News is
$2.23.
● The LI for MSNBC is 0.42, which means that the profit-maximizing price for MSNBC is
$1.71.
● The LI for CNN is 0.29, which means that the profit-maximizing price for CNN is $1.23.

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CONCLUSION
Both memos involve strategic pricing decisions in the context of the cable industry. They both
consider factors such as market research, cost per subscriber, and the concept of elasticity of
demand.

Memo 10 indicated that the affiliate accepting the $1.25 fee would result in increased costs, with an
additional $0.25 per subscriber per month. And, rejecting the offer carries its own drawbacks.
Analysts estimate a potential loss of 3% of customers within the first week of a dispute and an
additional 2% if it lasts a month. This would mean a loss of 40,500 subscribers and $486,000 per
year based on the current $1 fee.

To navigate this situation, a negotiation strategy should be pursued. Aim for a collaborative
approach that can create a win-win situation for both parties. Propose a retransmission fee between
$1.05 and $1.25 per subscriber, with an ideal target of $1.15. Prompt action is recommended to
prevent customers from switching to competing services.

Memo 11 discusses the potential need to offer single-channel pricing in response to pressure from
groups advocating for à la carte cable channel offerings. The memo provides data on the
programming cost per subscriber per month, estimated price elasticity of demand, and Lerner Index
for several popular cable channels.

The profit-maximizing prices for the channels are as follows:

● ESPN: $13.98

● TNT: $2.92

● Disney Channel: $3.33

● Fox News: $2.23

● MSNBC: $1.71

● CNN: $1.23

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APPENDIX

MEMO 10
● The additional cost per subscribers if the monthly fee per subscriber is $1.25:
$1.25 - $1.00 = $0.25.

● The total extra cost if the monthly fee per subscriber is $1.25:
Per month: $0.25 × 810,000 (subscribers) = $202,500.
Per year: $202,500 × 12 (months) = $2,430,000.

● A loss of subscribers will suffer if the dispute lasts a month:

5% × 810,000 = 40,500 (subscribers).
Per year: 40,500 x $1 × 12 = $486,000.