South-Western College Publishing - Economics  
Can a Merger Between Sirius and XM Radio Really Make People Better Off?
Topic Monopoly
Key Words Sirius, XM Radio, satellite radio, terrestrial radio, FCC.
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Reference ID: A159657590

News Story Recently, a merger between Sirius and XM, the two satellite radio stations, was announced. The merger would create the only satellite radio station, and the firms announced that such a merger was really in the best interests of all consumers. Are they Sirius - I mean, serious?

It all depends on how the particular market is defined, and that is ultimately what the Department of Justice and Federal Communications Commission will need to decide. If we look at the market for "satellite radio," then yes, a monopoly would be a bad thing. Consumers wanting to enter this market would have no alternative but to purchase from the single firm.

However, these two firms will argue that the market needs to be more broadly defined. XM and Sirius compete - either explicitly or implicitly - with terrestrial radio stations, MP3 players, iPods, cellular phones with music-capabilities, CD players, etc. If the market for "audio entertainment" is sufficiently and broadly defined, then such a merger may make consumers better off, because it will allow the new, larger firm to compete more efficiently against the other forms of entertainment.

And this merger is definitely in the best interests of these two firms. With a business model that is primarily driven by fixed costs rather than variable costs, merging with another company instantly cuts costs. The cost of Howard Stern's Sirius radio show is now much less expensive than before, given his guaranteed contract, which is irrespective of the number of listeners. What's more, the firms argue that such a merger would increase consumer choice, because it would allow the new firm to eliminate duplication of radio channels. By getting rid of duplicates, then additional channels could be opened for new content.

While both the Department of Justice and the FCC have expressed reservations about the proposed merger, the conclusion is far from assured. And this case will have repercussions elsewhere, as the definition of the market here will set a precedent for other markets to follow.

Discussion Questions:
1. Why does a firm with a fixed-cost driven business model want to merge with a similar company?
2. To decide upon the merits of this merger, discuss how the market should be defined. How broadly/narrowly should the FCC and Department of Justice consider the market? Why?
3. In general, why would this merger to create a monopoly be harmful to consumers?
Multiple Choice/True False Questions:
1. The primary source of costs for XM and Sirius are

  1. Fixed
  2. Sunk
  3. Variable
  4. Opportunity
2. Some goods that compete with satellite radio stations include
  1. iPods and MP3 players
  2. terrestrial radio stations
  3. CD players
  4. All of the above
3. True/False. A merger between the only two companies that sell a particular good to create the only firm that would sell a particular good is a monopoly, and such a merger should not be allowed.

Source "They Cannot be Sirius." The Economist. February 22, 2007.
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