South-Western EconNews: Irregular Remedy for Iridium

Irregular Remedy for Iridium

Subject

Equilibrium and comparative statics

Topic

Monopolistic competition

Key Words

Cost, Sales, Stock Price

News Story

Iridium is a relatively new hand-held satellite phone service. Calls can be made anywhere on earth. The cost of a phone is $3,000. However, sales are poor-there are only 3,000 subscribers and 500,000 are needed to break even. The stock price has tumbled from near $50 in November to under $20 a share.

The war in Yugoslavia has given Iridium a boost. News and aid organizations are using the phones in war zones where wired and cellular phones do not work. Viewers of television news see the phones in action.

In addition, as a humanitarian gesture, Iridium phones have been sent to refugee sites where refugees have been able to make free calls. The long lines have also been seen on television, giving Iridium even more exposure.

(Updated June 1, 1999)

Questions

1.	a)Why does the market for telephone service approximate monopolistic competition?
	b)How does Iridium differentiate its phone service?
	c)Why might there be some brand loyalty on the part of consumers?
2.	Draw a diagram showing the demand and marginal revenue curves of Iridium, and its marginal and average cost curves bearing in mind the facts in the news story.
	a)Show the equilibrium price and quantity of Iridium phones. Also shade in the area representing the loss.
	b)Explain how Iridium's humanitarian efforts and war sales may help the company's position. Illustrate on your diagram.

Source

Kevin Maney, "War in Yugoslavia gives Iridium chance to shine", USA Today, April 16, 1999.