C. Natural Monopoly: (20 minutes—if you are not through after 20 minutes, skip to the next question): All of the 10,000 students at Crony Capitalism University are addicted to The Social Network. The Social Network has no costs: the programming has been done, and the maintenance, bandwidth, and cloud-storage costs are negligibly small. The Social Network sells ads at $1/minute per student—thus if every student watches an ad the advertiser pays The Social Network $10,000; if half the students watch an ad the advertiser pays The Social Network $5,000; and if no students watch an ad the advertiser pays The Social Network $0. The students at CCU who do not install ad-blocking software on their browsers see all ads. The students at CCU who do install ad-blocking software on their browsers see no ads. The fraction F of CCU students who install ad-blocking software is given by the following equation:
- F = 0 + Q/300
where Q is the number of minutes of advertisements TSN sells.
- What is the revenue curve for advertisements sold by TSN—that is, how much money does TSN earn as a function of how many ads it sells?
- What is the profit-maximizing number of ads that TSN as a natural monopolist sells?
- Suppose that it costs each CCU student $300 to install ad-blocking software—they have to hire computer-science majors from Euphoric State as consultants to do the job, you see. Assuming watching each one-minute ad is equally painful in utility terms to each CCU student, what is the willingness--to-pay of CCU students for ad-blocking software?
- Suppose that CCU decided to charge each of its students a flat fee and use that money to get TSN to supply an ad-free version to CCU students. How large a fee would CCU have to charge to induce TSN to take the deal? Qualitatively, which CCU students would gain from this arrangement relative to the natural-monopoly equilibrium? Which CCU students would lose?