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Introduction to the TV market

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Introduction

Introduction to the TV market Part of the leisure industry, the TV broadcasting has a unique market structure. As well as competing with other forms of entertainment, large broadcasters compete with each other for viewers while using different ways to raise revenue. There are three aspects in the TV market in the UK, broadcasting, television production and TV manufacturing. These markets provide goods or services that are complements of each other because complements are in joint demand which means that in demanding one good a consumer is likely to demand another. Here in demanding TV set, a consumer is also likely to demand channels as well. And the demand for television production is derived from the demand for TV channels. Goods have a derived demand when the demand for one good is dependent on the demand for another good. Channels and their broadcasters derives demand for TV production as they need production to make a programme schedule. The market for the viewing of TV is complicated by a number of factors: - There is not a direct price for the purchase of commercial terrestrial TV. - Public terrestrial TV is paid for by the licence fee. - Commercial terrestrial TV is 'free to air' and it is funded through advertising revenues that advertisers pay who in turn receive their money from consumers. - The product is not supplied under the normal market price mechanism, as the products are not individually priced; Consumers do not pay directly for the specific programmes they demanded, but to pay for a whole channel, which means that consumers are paying for some programmes that they don't actually want. However, the recent trend in 'pay per view' in cable and satellite means that viewers can pay directly for their demands. The market for advertising airtime is very competitive, because airtime on one channel is a very close substitute to airtime on another channel. ...read more.

Middle

The merged firm can use its bargaining power to force down prices of programmes, therefore reducing its costs. Marketing economies: for example if two companies were to merge they will only need to advertise one brand name, where as two individual companies need to advertise two brands. Technical economies: resources are often more efficiently used in a larger the scale of production rather than a small scale. For example Granada might have a studio which is used only a few hours a day, but the merged company might be able to use the studio far more intensively because it more programmes to produce. Managerial economies: a larger firm can afford to hire specialist staff which is likely to increase efficiency. Granada and Carlton can share specialist departments, which can lead to greater output with the same resource. Financial economies: a larger firm will find it easier and also cheaper to take a loan for investment than smaller companies. This will encourage the merged firm to make more investments as it can borrow loans at lower costs. Diversification By growth, a firm can also increase its ability to control the market, because as a firm has more market share, it can restrict the supply in the market by controlling its supply, therefore can influence the market price. The other reason for growth is to reduce risks by diversification. How will the merger change the Market Structure? A market structure is the key characteristics of the market that affect the behaviour and performance of firms. These characteristics include: The number of firms and their size in relation to their competitors: In a perfectly competitive market there are a large number of small firms, in a monopolistic market and oligopoly there is a smaller number of firms, but in a monopolistic market the firms are of similar sizes, whereas in oligopoly a few firms supplies most of the output of the market. ...read more.

Conclusion

Some analysts estimate the merger would be able to save approximately �50 million per year, which will increase productive efficiency (if the average cost of production falls as well), and savings can be passed on to consumers. However, in reality evidence (G Meekes or K G Cowling) suggests that most mergers or takeovers actually lead to losses of economic efficiency, and it can be measured in a number of ways: * The profits of the combined company are lower than expected or even lower than the sum of profits of the companies, indicated by the stock market where the share price of the company taking over another falls when the takeover is announced. * Mergers lead to rationalisation of plant, which means lowering the productive capacity of the firm (shifting the supply cure to the left), and if the improvements in other areas of production do not compensate this lose, it will leads to a fall in the total revenue. * Employment falls because rationalisation of plant involves downsizing of the firm and cutting jobs. Conclusion A summary of the key arguments: The key arguments suggesting that the merger will increase competition The key arguments suggesting that the merger will reduce competition The market could actually become more competitive with fewer firms: the merger of Carlton and Granada will reduce the costs of ITV; therefore this also reduces average costs. This will put pressure on other competitors such as Sky to reduce their costs as well, making the whole market more competitive. A reduction in the number of firms. Barriers to entry become higher in a number of ways (see How will the merger change the Market Structure?), which prevents potential companies from entering the market. The new firm will enjoy some monopoly power, as it will be the largest commercial terrestrial channel. The firm can potentially abuse this power, for example it can rise the prices for airtime and the costs would eventually be passed on to consumers. Title: How will the proposed Granada -Carlton merger affect competition in the TV market in the UK? Toby Lee Page 2 Economics ...read more.

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