South-Western College Publishing - Economics  
FCC Is Making Waves In The Radio Business
Subject Monopoly versus competition; price discrimination
Topic Monopoly
Key Words Mergers, capital, license fees
News Story

The Federal Communication Commission is planning to allow low-power radio stations to broadcast at up to 100 watts within a four-mile radius. They will compete with full-power stations, which may have over 6000 watts. The objective is to restore diverse programming that has declined as stations have merged. The low-power stations could serve small communities, feature local programming and music artists, and give religious and ethnic groups and others some airtime.

The cost of capital and license fees would be approximately $2000, in comparison to the $1 million or so spent by full-power stations.

The National Association of Broadcasters is opposed to the plan because it would disrupt its broadcasts. Behind this technical point is apparently a worry that they will lose listeners.

(Updated February 1, 1999)

Questions
1. a) Draw a diagram of a regional market for radio programs assuming it approximates a monopoly. Include a marginal cost curve and the demand and marginal revenue curves. Mark the equilibrium price and quantity. Think of the price as being the price paid by advertisers during a program.
  b) If competition is introduced, how would the equilibrium number of programs change? What would happen to the price that could be charged to advertisers?
2. The Federal Communications Commission (FCC) can also be seen as a monopolist in the market for radio stations because it licenses all of them (except pirate stations). Draw a monopoly diagram of the market for radio stations, including the demand and marginal revenue curves and the marginal cost curve. Mark the equilibrium price (license fee) it charges and the equilibrium number of radio stations.
  b) What negative consequences follow for consumers and society if the FCC acts as a monopolist? Refer to the consumer surplus and the deadweight loss and illustrate on your diagram.
  c) On a separate diagram, show the effect of permitting additional, low-power, stations to be established at a lower price. Mark the price and the overall number of stations.
  d) What happens to the consumer surplus and the deadweight loss? Is the FCC's plan better for consumers and society?
Source Paul Davidson, "Airwaves soon may open to more voices," USA Today, January 7, 2000.

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