XVIII.  NATURAL MONOPOLY

CASE:  What's natural in comedy?

Did you hear the one about the two cable comedy channels?  They couldn't make it alone so they merged.  Not very funny?  I didn't think so either, that's why I never watched them.  [One is called the HA! channel and the other channel's name I don't recall].

The idea is that there are alot of costs that, on a per-unit basis, decline as output increases. This means that per unit costs may decline before they begin to rise. If costs are falling as you increase output, and there is more than one firm selling in the market, one of them may cut its prices. This would increase its own sales and cut its rivals sales. With its own sales increased, the firm's per-unit costs will fall. With its rivals sales cut, its rivals' per-unit costs will rise. By cutting their own price, the firm increases its sales, lowers its per-unit costs and raises its profits. It also cuts its rivals sales, raising their per-unit costs, and can run its rivals out of business because they cannot survive at such a low price. One firm is able to run the others out of business.

This, however, is not predatory pricing. Predatory pricing involves pricing below one's own costs. That is not the case here. Instead, it is a matter of competition driving costs to their lowest point, where there happens to be only one firm producing.

The cable comedy channels claim that cable comedy is a natural monopoly, that the market is large enough for only one to survive. Well, that is what they claim.  Whether this is true or the two companies got together to increase their profits by forming a monopoly, I don't know.  Their claim is a plausible one, though.

                                                              
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