Memo 1

To: Pricing Manager, Tri-State Region

From: Regional Vice President, Tri-State Region

Re: Revenue from EPIX

We recently added the EPIX Movie Channels as part of a new tier of programming for our digital video subscribers. The EPIX channels are sold as an add-on package for $9.75 per month, but we would like to potentially increase our revenue from our subscriber base. Currently we have about 15,059 subscribers, generating monthly revenue of $146,823.

Some have suggested we should cut price, as customers tend to be fairly price sensitive for add-on packages. However, in this case, if we lower price for our new subscribers, we really need to cut it to all of our existing subscribers as well. I have some concerns that lowering price will be counter-productive.

The marketing department calculated some subscription levels at various price points in this region, and I need you to perform the analysis. Specifically, I want you to estimate the price sensitivity of customers at the current price. Please address the following questions:

(1) If we lower the price, do you think this is likely to lead to higher revenue, and

(2) how much potential revenue can we generate and how low should go with our price.

The demand equation from the regression is as follows:

Qd = 39.057-2.462P (from the information in the Excel data)

3.) Calculate elasticity at current price of $9.75

4.) Inverse demand: P = 15.869-0.406

What is Marginal revenue?

Set MR = 0 and solve for P and Q.

Use this information from the regression plus the information in Memo 1 to answer questions 1 and 2. You do not need to discuss the output of a regression.

Time Warner Cable Solution to MEMO 1:

Revenue from EPIX

Using the Epix.xlsdata file, estimation of a linear regression will give the following output:

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.9463
R Square	0.8955
Adjusted R Square	0.8900
Standard Error	2.6757
Observations	21
ANOVA
	df	SS	MS	F	Significance F
Regression	1	1166.15	1166.15	162.88	0.000
Residual	19	136.03	7.16
Total	20	1302.17
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	39.057	2.015	19.383	0.000	34.840	43.274
Price	-2.461	0.193	-12.763	0.000	-2.865	-2.058

Table:

Price	Number of Subscribers (Thousands)	Cost of License Fees (Thousands)	Divisional Sales, General and Administrative Costs (Thousands)
$5.00	29.974	$ 134.883	$ 14.50
$5.50	29.256	$ 131.651	$ 14.50
$6.00	17.822	$ 80.199	$ 14.50
$6.50	22.657	$ 101.956	$ 14.50
$7.00	19.897	$ 89.537	$ 14.50
$7.50	16.671	$ 75.017	$ 14.50
$8.00	20.492	$ 92.213	$ 14.50
$8.50	20.000	$ 89.998	$ 14.50
$9.00	19.760	$ 88.920	$ 14.50
$9.50	17.123	$ 77.053	$ 14.50
$10.00	12.644	$ 56.896	$ 14.50
$10.50	12.785	$ 57.531	$ 14.50
$11.00	12.216	$ 54.974	$ 14.50
$11.50	13.246	$ 59.608	$ 14.50
$12.00	8.637	$ 38.867	$ 14.50
$12.50	10.595	$ 47.678	$ 14.50
$13.00	5.857	$ 26.357	$ 14.50
$13.50	2.615	$ 11.768	$ 14.50
$14.00	2.739	$ 12.326	$ 14.50
$14.50	5.291	$ 23.809	$ 14.50
$15.00	3.051	$ 13.730	$ 14.50

Estimates of market penetrationin the Tri-State Region based on different price levels.

License fees representthe fees that we must pay to Epix for the rights to re-transmit their channels. Fees are based on the number of subscribers.

Thanks for your help.