The Cable Operators' Price Agreement That Collapsed
Three cable television operators - A, B and C - serve Bhubaneswar and Cuttack. Each has about 20,000 subscribers and each charges ₹350 a month for the basic pack. In January the three owners met and agreed to hold the ₹350 price and not to poach each other's cable colonies. In March, operator B quietly offered the pack at ₹300 to any colony that switched, and picked up 6,000 subscribers, 3,000 from each rival. A and C lost subscribers and, in April, both cut their price to ₹300; B's new subscribers mostly stayed, but the industry's total subscriber base hardly changed. By June all three were charging ₹300, each with roughly 20,000 subscribers, and all three reported losses. Since then no operator has dared to raise the price, even though the cost of set-top boxes, cable and staff has risen.
1. Identify the market structure and explain, with the revenue figures, why the January agreement broke down.
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Market structure: oligopoly - three sellers, mutual interdependence (each firm's sales depend on rivals' prices), a near-homogeneous basic service, and high entry barriers in the form of cable networks, local rights and licences. The January meeting was an attempt at collusion (a cartel) to earn joint monopoly-type profits.
Why it broke down - the cheating arithmetic
- B before cheating: 20,000 × ₹350 = ₹70,00,000.
- B after cheating: 26,000 × ₹300 = ₹78,00,000 - a gain of ₹8,00,000.
- A (and similarly C) after losing 3,000 subscribers: 17,000 × ₹350 = ₹59,50,000, a loss of ₹10,50,000 each.
- B's ₹8 lakh gain was financed by ₹21 lakh of losses at its rivals.
Each member therefore has a private incentive to break the agreement secretly, because the cheater captures the whole gain while the cost is spread over the others. With no enforcement mechanism, the agreement was not credible - the classic prisoner's dilemma.
After retaliation: all three at ₹300 with 20,000 subscribers = ₹60,00,000 each; industry revenue ₹1.80 crore against ₹2.10 crore under the cartel. Everyone is worse off than before. Such price-fixing agreements are also void and penalised under the Competition Act, 2002.
2. Use the kinked demand curve to explain why the price has stayed at ₹300 and nobody has raised it despite rising costs. What are the limits of this explanation?
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The kink at the current price (₹300).
- Above ₹300: if one operator raises its price, the other two will not follow (they gain subscribers by staying put). The firm's demand curve is therefore highly elastic above the current price - a small rise loses a large slice of subscribers.
- Below ₹300: if one operator cuts, the others match within weeks, as happened in April. The firm's demand curve is therefore less elastic below the current price - a cut wins very few new subscribers, because the market total hardly changes.
- The result is a kink at the ruling price, and the marginal revenue curve has a vertical gap at the current output.
Why price is rigid. As costs rise, the MC curve shifts upward but can move within the vertical gap without crossing MR in a way that changes the profit-maximising output. Each operator fears that raising price would hand its subscriber base to rivals, and that cutting price would only trigger a matching cut. So the price sticks at ₹300 and the firms absorb the higher costs as losses.
Limits of the explanation. It explains rigidity at an existing price but not how ₹350 was reached in the first place, nor why the price moved from ₹350 to ₹300. It ignores regulated cable tariffs, competition from DTH and OTT platforms, differences in content cost, and the possibility that a large enough cost increase will force a joint rise. It is a model of behaviour, not a prediction of the exact price.
3. The same city has dozens of beauty parlours charging similar but not identical rates. Contrast their market with the cable operators' market and advise a new parlour on how to compete.
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The parlours are monopolistically competitive: many sellers, product differentiation (skill, hygiene, brands used, ambience, location, home service), free entry and exit, selling costs such as local advertising, and some - but limited - price-setting power. Because entry is free, supernormal profit attracts new parlours until each earns only normal profit, and each operates with excess capacity - it could serve more customers at a lower average cost, but demand for its particular brand is limited.
Contrast with cable oligopoly: three sellers versus dozens; homogeneous basic service versus differentiated service; blocked entry versus easy entry; recognised interdependence and price rigidity versus independent pricing within a narrow band.
Advice to the new parlour
- Do not start a price war: rivals can match a cut within a week, and all that results is the cable operators' outcome - lower margins, no extra customers.
- Compete on differentiation: trained staff, branded products, hygiene certification, appointment booking, bridal and home-service packages.
- Build local reputation and a repeat clientele, since demand for a differentiated service is built by word of mouth and trust.
- Watch costs and capacity: because entry is free, a price premium survives only if the differentiation is real and hard to copy.