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PVRs will negatively impact the demand from advertisers as end viewers have the option to block advertisements at will. Thereby, the demand for advertising space on television channels will decline significantly.
2. Suppose you are in charge of setting the price for commercial advertisements shown during Enemies, a top network television show. There is a 60-minute slot for the show. However, the running time for the show itself is only 30 minutes. The rest of the time can be sold to other companies to advertise their products or donated for public service announcements. Demand for advertising is given by:
Qd = 30 - 0.0002P + 26 V
where Qd = quantity demanded for advertising on the show (minutes), P = the price per minute that you charge for advertising, and V is the number of viewers expected to watch the advertisement (in millions).
a. All your costs are fixed and your goal is to maximize the total revenue received from selling advertising. Suppose that the expected number of viewers is one million people. What price should you charge? How many minutes of advertising will you sell? What is total revenue?
b. Suppose price is held constant at the value from part (a). What will happen to the quantity demanded if due to PVRs the number of expected viewers falls to 0.5 million? Calculate the "viewer elasticity" based on the two points. Explain in words what this value means.
a. Condition for revenue maximization is marginal revenue equal to zero i.e. MR = 0
Given: Expected number of viewers = 1 million
Qd = 30 -0.0002P + 26V
1) Find P in terms of Qd
P = 150000 +130000V - 5000Qd
2) Multiply both sides of the above equation by Qd
P * Qd = 150000 Qd +130000V Qd - 5000Qd2 â€¦â€¦ equation 1
Total Revenue (TR) = P * Qd
Therefore, substituting the above formula in equation 1 gives the following
TR = 150000 Qd +130000V Qd - 5000Qd2
3) Differentiate the above equation with respect to Qd
d(TR) = 150000 + 130000V - 10000 Qd
4) Since marginal revenue is the differential of TR with respect to Qd and MR = 0 for revenue
maximization, the above equation becomes
MR = 150000 + 130000V - 10000 Qd = 0
5) By substituting V = 1 in the above equation and solving for Qd, the value of Qd is obtained.
Qd = 28 minutes
6) Thereby, the value of P can be found as follows
P = 150000 +130000V - 5000Qd
P = 150000 +130000 * 1 - 5000 * 28
P = $ 140,000
7) The maximum revenue is calculated as follows
TR = P * Qd
TR = 140000 * 28 = $ 3,920,000
Thus, the price charged is $ 140,000, the minutes of advertising sold is 28 minutes, and the total revenue is $ 3,920,000.
b. Expected number of viewers = 0.5 million
Price = $ 140,000
Therefore, Qd = 30 -0.0002P + 26V
Qd = 30 - 0.0002 (140,000) + 26 (0.5) = 30 - 28 + 13 = 15 minutes
The quantity demanded has gone down from 28 minutes to 15 minutes.
The viewer elasticity can be calculated as follows: |Ep|= (âˆ†Q/âˆ†V) * (V/Q)
|Ep|= ((28 - 15)/0.5) * (1/28) = 13/14 = 0.9285
As |Ep|< 1, this suggests that viewership is inelastic. Therefore, a decrease in the number of viewers will decrease the demand for advertising.
3. As more viewers begin using PVRs, what happens to the revenues of the major networks (CBS, NBC, ABC, and FOX)?
An increase in the usage of PVR will result in a decrease of revenues of major TV networks. Increasing adoption of PVR reduces the ad-viewership and hence there is a fall in revenues of major TV networks. The total revenue is given by price * quantity demanded. If the price remains constant, then a decrease in the total quantity demanded will result in a corresponding decrease in the total revenue.
4. Discuss the long-run effects if a significant proportion of the viewers begin adopting these "advertising snipping" systems.
The long-run effect of increasing adoption of PVRs is that fewer advertisers will resort to television advertising and thereby the revenues of major broadcast networks will suffer. There will be a decrease in demand for television advertising and advertisers will be forced to look at other means of advertising such as online advertising and newspaper advertising. Advertisers will have to develop novel models to reach the end consumer as TV will no longer remain a passive medium of communication. Additionally, advertisers will have to think of innovative ways to keep the audience engaged.
5. What advice would you give the major commercial networks and producers of programming for these networks as more consumers adopt PVRs?
Our advice to major commercial networks and producers of programming for these networks is that they should compel advertisers to cash in on the futuristic technologies that offer new media formats for further exploration, thereby resulting in good flow of revenues for broadcast networks. The digital technologies available on PVRs can be exploited by advertisers to develop more effective advertising techniques. PVRs can dramatically improve the value and efficiency of television advertising as advertisers can invest in better-targeted ads that are more likely to capture the attention of the viewers. PVRs can also be used to measure the number of times an ad is viewed or skipped and viewers can pay for advertising content by opting to watch ads. Advertisers can also adopt new advertising strategies such as personalized advertising or advertising that conveys the message even when in fast-forward mode. Also, a television programme can be associated with a brand and advertisers can use such programmes to promote their products.