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B. Venkatesh

WORLDSPACE, a satellite radio broadcaster, has hiked its annual subscription by 50 per cent. My friend says the price hike does not surprise him. His argument is this: WorldSpace is currently a monopolist in India. And monopolists charge unfair prices. This argument is not quite correct. Why?

The objective of all producers is to maximise profits. And that can happen only if the product is attractively priced. It is no different with monopoly goods.

If you think the annual subscription is high, WorldSpace simply has one less customer. Of course, my friend has a point. What if the company does not expect many new customers? Maximising profits would then be possible only by hiking annual subscription.

There is another factor to support my friend's view. You need a receiver to listen to the music. Suppose you own a receiver. This receiver is of no use if you do not subscribe to the WorldSpace satellite radio service.

You may, therefore, choose to suffer modest hikes in subscription rates just to ensure that your investment in the receiver does not go waste. To put it economic parlance, your demand for the radio service is moderately price elastic.

So, now there are two factors to support my friend's argument: not many new customers and moderately price elastic demand from existing customers.

But this argument misses one point. No product is a strict monopoly. If the company continues to hike prices, you may choose to consider the receiver as a dead investment, curse the company and switch to FM radio.

There is yet another factor. High subscription rates could make the business very profitable, attracting new entrants. And competition always drives down prices. So, even monopolists cannot simply charge unfair prices. Their objective is also to maximise profits not prices.

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