p.p1 underline ; font-kerning: none} span.Apple-tab-span {white-space:pre} A monopoly

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0px 0.0px; font: 12.0px Baskerville; color: #444444; -webkit-text-stroke: #444444; min-height: 14.0px}span.s1 {font-kerning: none}span.s2 {text-decoration: underline ; font-kerning: none}span.Apple-tab-span {white-space:pre}A monopoly is a market where one firm dominates the market for a good that has no substitutes and where significant barriers to entering the market exist. Disney, a prominent example of a monopoly, is a company that has gained a reputation for seizing control in the market of entertainment especially after acquiring ESPN through ABC in 1995.

However, this acquisition of ESPN is what is currently jeopardizing the economic system that Disney has created for itself. As a result of available substitutes to the cable network (i.e. streaming).

ESPN subscribers are declining rapidly. Though this may not seem as though it would affect Disney’s profit and revenue to a high extent, it has the potential to be a serious financial issue. Cable networks accounted for 34% overall of Disney’s revenue according to the company’s annual report of 2014.

The following year it was estimated that the decline in subscribers would result in the loss of $700 million in fee revenue and $200 million in earnings.  When one regards Disney’s economical standpoint from a smaller scale, one is able to see how this can be a problem in the long run. Take, for example, Disney’s influence on the urban economy of Anaheim and Orlando. Disney happens to be one of the primary reasons for the economic success of Southern California.

An economic impact study conducted by Arduin, Moore Econometrics concluded that Disney generated $5.7 billion annually for the economy of Southern California. The corporation also put forward $370 million towards the state and local taxes. The study on which this information contains fiscal data from 2009, therefore the numbers are likely to be much higher. Employment rates have also benefited from Disney as 1 in 50 jobs in California have ties to the corporation.

The state is codependent with Disney which makes the loss of subscribers from cable networks under the company’s name all the more important. To better illustrate how the loss of cable network subscribers has the potential to decrease productivity and revenue of the company, consider the following graph.   Economies of scale illustrates a situation in which there are greater profits (increasing returns to scale) to a firm due to decreased average total cost (ATC). Diseconomies of scale illustrates a situation in which there are fewer profits (decreasing returns to scale) as the ATC of the firm increases as a result of ESPN’s overall decreasing value for entertainment.  The loss of subscribers will not serve as a problem in the short run as Disney has a competitive advantage over other companies in that it is a larger corporation which entails lower average cost. Given this, it will take more than a loss of cable networks to put Disney out of business as its income is, in part, due to the profits obtained through their numerous theme parks. The same cannot be said for the individual firm of ESPN. Although the current model of business for ESPN will be sustainable in the short-run, the same cannot be said for the long run.

Why? Well, considering that ESPN brought in 46 % of the firm’s operating cost in the past (2014), one must analyze the consequence of having this percentage drop. A drop in operating costs would threaten the upkeep and advancement of the theme parks which, in turn, would lower profit and revenue generated from theme parks as well. The surmounting costs that Disney will have to bear will eventually move the company past the minimum efficient scale and into diseconomies of scale, where the decreasing returns to scale (i.e.

lower profit) increases the LRATC.  To put this into perspective, suppose that C2 in Figure 1.1 represents the cost per month of the subscription ($7 as stated by the article) and Q2  represents the number of subscriptions sold to consumers at that price.

At C2, the quantity supplied is quite low yet it still satisfies the graph in that it is within the economies of scale. Now, consider an increasing loss of quantity sold. This illustrates that, as a result of higher price, there is a decline in demand for the product. This lowers revenue thus lowering profits as well. Lowering the price may increase the demand as portrayed by C1 and Q1 on the graph however, in present circumstances, with streaming gaining more control in the market, any increase in demand as a result of price will be minimal. Lowering price beyond the value of C1 would put the firm into diseconomies of scale where average total costs now rise due to lower profit. In either case, the profit is bound to drop which creates problems for Disney as a whole due to how the firm has modelled itself to be relatively reliant on the generated profit from ESPN.

  The article advocates for Disney to cut its losses short and sell ESPN to another company such as ComCast,. It has been predicted that the subscribers will increase however, technological advancement will always remain as a possible substitute to cable networks, therefore maintaining the firm may be, as the article says, more trouble than its worth. Especially since jobs in California are quite reliant on Disney, as mentioned earlier, and the loss of said jobsExiting the market for cable networks would then be the wiser approach. If the situation presented becomes progressively worse in that ESPN generates further losses for Disney, it would be wiser to then apply the shut-down rule. The shut down rule advocates the idea that when a firm’s losses exceed its profit, it should close down as a means of minimizing losses. If Disney wishes to stay in the market of cable of networks, it would be in their best interests to apply this economic concept to prevent excessive loss of revenue and profit.