Running Head: ECONOMICS OF SATELLITE DISH PROVIDERS

Economics of Satellite Dish Providers

Abstract
The satellite dish industry follows the laws of supply and demand. Demand is associated with product pricing. Satellite dishes are considered to be price elastic because the demand varies with price. The following items will be discussed in terms of demand and product pricing:
* Utility
* The Law of Diminishing Marginal Utility
* Determinants of Demand
* Substitutes and Complements
* Elasticity

Costs of production are a basis for product pricing. A company cannot make a profit by selling a product below production costs. Costs also affect the supply of a given product or service. The following will be discussed in relation to costs and supply:
* Costs
* The Law of Diminishing Returns
* Determinants of Supply

The market structure in which a firm operates affects both price and non-price competition. The following components of market structure will be discussed:
* Defining Characteristics
* Implications
* Non-price Strategies
Economic forecasts affect all determinants of supply and demand. Being an elastic product, satellite dishes are vulnerable to economic forecasts. The following will be discussed about economic forecasts:
* Supply Indicator
* Demand Indicator
* Implications

Table of Contents

Product Pricing....................................................................5-8

Costs.................................................................................8-11

Market Structure...................................................................11-15

Economic Forecast................................................................15-16

References..........................................................................17

Economics of Satellite Dish Providers
Product Pricing Demand is a curve that shows the amount of a product consumers are willing to purchase at a variety of different prices during a specific period of time. There is an inverse relationship between product price and demand. All else equal, as price falls, the quantity demanded increase, and as price rises, the quantity demanded decreases. All else equal is important in this statement. There are several determinants of demand other than price which are discussed below.
Utility
Utility is a measure of satisfaction or happiness from buying goods or services. The more utility there is the happier the person is. In this situation, the utility is the satisfaction which the consumer gets by watching television using his satellite dish.
Law of Diminishing Marginal Utility Marginal utility is additional utility derived from each unit of goods acquired. According to the law of diminishing marginal utility, as consumption of a product increases there is a decrease in the marginal utility that person receives from each additional unit of that product. Since most consumers will only purchase one satellite dish, let's look at this in terms of number of channels. One channel is great. Two channels are twice as good as one, but the satisfaction gained from each additional channel diminishes as the number of channels increases. The satisfaction gained between the forty-ninth channel and the fiftieth is much less than the satisfaction gained from the first to second additional channel. For example, DirecTV has a basic package which they call Total Choice. This package includes 135 channels. One of their premium packages, Total Choice Premier, includes 215 channels (DirecTV 2005). The utility of each additional channel is diminished because the consumer can only watch one channel at a time and each additional channel has diminished marginal utility.
Determinants of Demand Changes in buyer tastes- Satellite dishes have a number of advantages. For example, DirecTV has an offer called NFL Sunday Ticket which allows people all over the world to watch every NFL game in the season (DirecTV 2005). Cable only shows each game in certain regions. If consumers become more interested in football, they will be more likely to purchase a satellite dish. In this situation, demand for satellite dishes would increase.
Change in number of buyers- The change in the number of buyers does not affect the demand for satellite dishes. Satellite dishes are available to everyone. The only way this determinant could affect demand is if the population were to increase.
Change in income- As income increase, demand for satellite dishes will increase. As income decreases, demand for satellite dishes will decrease.
Change in price of related goods- A substitute for a satellite dish is cable television. If the price of cable were to increase, the demand for satellite dishes would increase because some consumers will switch from cable to satellite. The opposite is also true. If the price of cable were to decrease, the demand for satellite dishes would decrease.
Change in expectations- Consumers' expectation of a change in income or price will affect demand. For example, if a consumer is worried about losing his job, he will not purchase a satellite dish in order to save money for the future. In this case, demand would decrease.
Substitutes and Complements
As mentioned previously, cable television is a substitute for a satellite dish in areas where cable is available. If the price of cable were to increase, the demand for satellite dishes would increase if the price of satellite service was to remain constant. However, the increase in the price of cable would allow for an increase in the price of satellite service.
A satellite dish and satellite service could be considered complementary goods. However, in this example the price of each has no affect on the price of the other. If a consumer were to sign up for service without owning a satellite dish, the company providing the service would give them a dish. The monthly fee would be no different if the consumer already owned a satellite dish. The difference is in the service contract. If the company gives the customer a satellite dish, they must sign a contract for a certain length of time. If the customer already owns a satellite dish, they are allowed to have their service on a month to month basis which can be cancelled anytime. Since there is no difference the amount of the month fee for the service, a change in the price of satellite dishes will have little affect on the price of satellite service.
Elasticity
A product or service is considered elastic if demand changes when price changes. That is, if price increase quantity demanded decrease, and is price decreases quantity demanded decrease. In general, luxury goods are price elastic. Satellite dish service is a luxury item, so if the price increases demand will decrease.
Recommendation
Satellite dish providers should find the price at which quantity demanded is in equilibrium with quantity supplied. With only taking demand into consideration, it is important to make satellite dish service as appealing as possible to consumers in order to increase demand. Because satellite dish service is elastic, it is important to make consumers want to purchase it when the determinants of demand change. When consumers have to cut luxury items out of their budget, they will cut out the ones that are least important or appealing. One way to increase demand is to accommodate change in buyer tastes. DirecTV is already doing a good job at this by offering a variety of channel packages which are marketed to different tastes. DirecTV offers a variety of sports and movie packages to increase demand among certain demographics.
Costs
Supply is a curve which shows the amount of a product producers are willing to sell at a variety of different prices during a specific period of time. There is a direct relationship between price and supply. As price rises, the quantity supplied increase, and as price falls, the quantity supplied decreases (McConnell, 45). Higher prices means increased profits, so suppliers have an incentive to supply more.
Costs
The costs which follow will be based on hypothetical data on a yearly basis unless stated otherwise. Labor- Labor includes people who make that actually satellite dish, people who install and repair them, and people who perform administrative duties. 500 employees making an average of $35,000 per year would cost $17,500,000. Materials- Materials needed to make and install a satellite dish would include plastic, metal, computer chips, wires, and cables. Yearly cost would be difficult to determine because it would depend on the number of satellite dishes made each year which is highly variable. Material costs per dish would be $30. Equipment- Equipment would include machinery, vehicles, and tools. Purchasing new equipment and maintenance on old equipment will cost $2,000,000 per year. Utilities- Utilities include fixed costs such as electricity, gas, and phones. This will cost $50,000 per year. Insurance- Liability insurance will cost $500,000 per year. Taxes- There are a number of taxes associated with running a business. These taxes include property tax and sales tax on materials and equipment which are purchased for the business. Taxes are $50,000 per year. Research and Development- With technology constantly changing satellite dish companies must spend money on research and development in order to stay competitive. This can include improving production or developing new products and improving new ones. This cost will vary with profits but an estimated yearly cost would be $2,000,000. Fees- The satellite dish a customer puts on their house picks up a signal from a satellite somewhere in space. The satellite dish company does not own this satellite, so they must rent space on it. Other fees would include licensing fees. This would cost $5,000,000 per year. Advertising/Marketing- Once a company has a product to sell, they must advertise it. Advertisement can be in the form of newspapers, magazines, television, radio, or a number of other forms. Advertising and marketing will cost $5,000,000 per year.
Law of Diminishing Returns
The law of diminishing returns states that if one factor of production is increased while the others remain constant, the overall returns per unit will decrease after a certain point. For example, if more workers are hired to make satellite dishes, production and profits would increase. However, since all other factors remain constant, each additional worker will not be able to do the same amount of work. This is because there is only so much factory space and the amount of equipment is constant. Four people working using the same piece of equipment will do less than four times the amount of work as one person using that piece of equipment.
Determinants of Supply Change in Resource Prices- The costs of resources affects the total cost of production. Labor is one resource associated with satellite dishes. If the cost of labor were to increase while the price of satellite dishes remains constant, profits would decrease. The quantity supplied at this particular price would decrease. Change in Technology- Technological advances can lower the cost of production. With lower production costs, supply would increase. Change in taxes- Tax is considered a cost of production. If a certain tax were to increase, such as property tax, the cost of production would increase. An increase in taxes would result in a decrease in supply. Change in price of other goods- If the prices of other goods increase, some firms switch to producing a different product. It is unlikely that a company which makes satellite dishes would produce another product because of a short term change in price, so this determinant of demand would not be relevant. Change in Expectations- An expected increase in the price of satellite dishes in the future will affect the number of satellite dishes supplied now. Fewer satellite dishes may be supplied now with an expected increase in price. Change in Number of Suppliers- If the number of suppliers of satellite dishes increase, the number of satellite dishes supplied would also increase. The opposite is also true. If some firms were to pull out of the industry, supply would decrease.
Recommendations
Cost reduction is an easy way to increase profits. An effective form of cost reduction for a satellite dish provider would be to purchase a satellite to reduce the cost of renting space on someone else's satellite. Most satellites are owned my huge conglomerates of venture capitalists solely for the purpose of renting space to firms such as satellite dish providers and cell phone companies. If a satellite dish provider such as DirecTV were to invest in its own satellite, they could cut a lot of costs in the future. It would be a large investment now, but costs will be lower over the years. They could also decrease the cost of the initial investment by doing what other satellite companies do and rent out their satellite to other companies for a variety of purposes.
Market Structure
There are four basic market structures in which an industry can be categorized: pure competition, pure monopoly, monopolistic competition, and oligopoly. Pure competition involves a large number of firms producing a standardized product. Firms can enter or exit the industry easily. Pure monopoly is a market structure in which one firm is the sole seller of a product or service. There are factors which block other firms from entering the industry. Monopolistic competition involves a large number of sellers producing differentiated products. This involves non-price competition and entry or exit from the industry is done easily. An oligopoly involves only a few sellers of a standardized or differentiated product. Each firm is affected by decisions made by their competition and must account for this in product pricing (McConnell, 413-414). The market in which satellite dishes compete in can be classified as an oligopoly.
Defining Characteristics Number of firms- There are a few large firms in an oligopoly market structure. Firms in the satellite dish market include DirecTV, and Dish Network. Type of product- An oligopoly can have either standardized or differentiated products. In the case of satellite dishes, products are differentiated. While each satellite provider offers a number of channels, the channels available under certain channel packages differ with each provider. For example, DirecTV offers a premium package which includes seven different HBO channels (DirecTV, 2005), while Dish Network offers eight different HBO Channels (Dish Network, 2005). Control over price- Control over price is limited by mutual interdependence among firms. Each firm is in a sense a price maker in that it can set its own price to maximize profits. However, each firm must consider how other firms will react to a change in price, output, or advertising. For example, if DirecTV were to lower its price to gain more of the market, Dish Network may react by lowering their price in order to keep their customers. If both companies lower their price, demand may increase, but profits per unit will decrease. Conditions of entry- Economies of scale are significant entry barriers for oligopolistic industries. Satellite dish companies must rent space on a satellite or even more expensively, put up their own. This huge cost prevents smaller firms from entering the industry. Non-price competition- There is a great deal of non-price competition among oligopolies. Firms try to convince consumers that they offer a superior product compared to their competitor. This can be done in a variety of ways such as advertising, special promotions, free gifts, or better customer service and technical support. Of course, all of these things increase costs. Firms will use non-price competition despite increased costs because it will increase profits more than lowering price.
Implications
Since satellite dish providers give satellite dishes to their customers for free with service, I will discuss product pricing in terms of satellite service instead of the price of the actual dish. The following table shows the price of basic television packages offered by DirecTV and Dish Network.
Dish Network DirecTV
60 Channels for $31.99/mo
120 Channels for $42.99/mo 135 Channels for $41.99/mo
180 Channels for $52.99/mo 155 Channels for $45.95/mo
230 Channels for $86.99/mo 215 Channels for $93.99/mo
As you can see, the prices between the two companies are similar for the same number of channels. This is because of the oligopolistic market structure. DirecTV knows that is they lower their prices; Dish Network is likely to react by lowering their prices. Each company would then lose profits. Dish Network has taken an interesting approach to their pricing strategy by offering a small package of only 60 channels at a price lower than any basic package offered by DirecTV. Dish Network will get the customers who want a satellite dish, but do not have a lot of money to spend on the hundreds of channels offered by DirecTV.
Non-price Strategy
Because pricing is so similar among oligopolies, several non-pricing strategies are used to preserve or enhance sales. DirecTV can improve their competitiveness in the market a number of ways without changing the price of their service. DirecTV could try to offer unique channels that other satellite providers do not offer in order to attract niche markets. They could improve technical support and improve warranty coverage. Another common practice is to bundle television with other services such as internet. The satellite provider can offer internet service at a discounted rate without changing the price of the television service. This will help attract new customers and keep existing customers who previously paid for television and internet separately. DirecTV and Dish Network are now both offering DVR which allows their customers to record live television. Offering other services such as these is a great way to stay competitive without changing prices.
Overall Competitive Strategy
Having a good product to offer customers is great, but the business will not grow if the public does not know about it. Advertising is key in order to stay competitive. A strategy that DirecTV could take advantage of is to advertise where people who are not currently their customers will see it. They should continue to offer more services at a variety of prices, and advertise these services on cable television and on Dish Network's channels.
Economic Forecast
Supply Indicator
GDP is a good indication of the state of the economy. The Congressional Budget Office has forecasted the percentage change in GDP as follows: 4.1 for 2005, 3.0 for 2006, and 3.0 for 2007 (Economic Outlook, 2005). While GDP is expected to increase, the rate of increase per year is expected to decline. As a result, taxes may be reduced in order to make more money available to stimulate the economy. Decreased taxes mean decreased cost of production. With a decrease in production costs, supply will increase.
Demand Indicator
Unemployment rate is an economic indicator which will affect the demand for satellite dishes. If the unemployment rate were to increase, income will decrease, which will decrease demand. According to the Congressional Budget Office, the unemployment rate is expected to remain constant at 5.2% from 2005 to 2009 (Economic Outlook, 2005). With the unemployment rate remaining constant, demand for satellite dishes should remain fairly constant.
Implications
If the economy remains strong with low unemployment, the satellite dish industry should see increased profits.
Recommendations
The best recommendations given these economic forecasts would be to keep prices low while increasing the quality of service. Increase the amount of money spent on advertisement now to attract new customers. With a slower increase in GDP in the future it will be harder to attract new customers, but since GDP is increase and unemployment is remaining constant, it shouldn't be difficult to keep existing customers.
References
Economic Outlook. (2005). Congressional Budget Office. Retrieved Aug. 18, 2005 from http://www.cbo.gov/showdoc.cfm?index=5773&sequence=3
Direct TV. (2005). Retrieved Aug. 23, 2005 from http://www.directv.com
Dish Network. (2005). Retrieved Aug 24, 2005 from http://www.dishnetwork.com
McConnell, and Brue. (2005). Economics- Principles, problems, and policies (16th ed.). New York: McGraw-Hill.