cost nature. But, in practice, the behavior of crble systems is increasingly limited by local and federa, reculation, and by competition among firms for franchises. Both of these forces sharply restrict the ability of cable firms to að dan price or output at will. Present regulation and competition for new franchises, poul the threat of more extensive regulatory action if firm behatz is perceived as excessive, has kept monthly subscriber rates virtually constant in current prices over several years. Se. in 1970, found most recently franchised systems charging herveer $5.00 and $7.00 per month. In their sample of Factbook #s Comanor and Mitchell reported a mean price of $5.00 per month Park in 1972 has an annual average price of $3 for his sample of A-contour cable systems. The assumption that moderate cost increas including copyright fees, cannot be passed on in the form of E prices is consistent with the recent market experience. Assuming no price response by cable firms if a 16.% surcharan were imposed requires further discussion. Firms would doubtless make strong representations to local authorities about the need fir higher prices, and bids for new franchises would quote higher rates. But granting for the moment that regulators allowed part or all of the surcharge to be translated into higher subscriber rates, how would cable profits be affected? The answer depenis primarily on how rapidly penetration w de line as prices were raised: in technical e in mic terms, on the elasticity of demand. If for example a le.% increase in price from $5.00 per month to $5.81 results in a 16.5% de rease in peretration say from 30% to 25% of h mes passed then the higher price has (approximately) 4′ no effect on total subscriber gelere--it is fully offset by reduced demand for servi e. A basic result of exhmic theiry states that consumers' demand for a service will be increasingly sensitive to its price as re and ci ser substitutes are available for that service. Thus h user ide in areas with a diversity of broadcast s.mals with generally clear reception and with a variety of entertainment alternati es ca be expected to decline service rapidly as prices rise. This availability of god sutstitutes for CATV des ribes must t plu markets. The ei in metric work of R.F. Park confirms this de free f price elasticity of demand in such areas in fact the fig.rea in the example alone correspond aim at exa tầy to Park a statuat, al How then would cable systems' profits be affected by a lé's copyright payment and a concommitant rise in subscriber rates? Revenues would be unchanged, while operating costs would increase sharply by the amount of the copyright payments. There would be some small offsetting changes in other incremental costs resulting from the saving achieved by not serving the subscribers do not purchase service at the higher price. For typical systems there are rather small costs of installing additional drop lires additional maintenance and billing expenses and slightly higher taxes and dues related to numbers of subscribers. In consequence, the net effect of allowing higher subscriber rates in conjunction with 16.5% copyright fee payments would be t reduce rates of return to nearly the same levels as would be achieved by holding subscriber rates unchanged with the same 16.4% copyright fees. In addition penetration would be lower providing a narrower base for future leased-channel services capable of generating additional payments from cable systems to program 8-pỹ..#1# We remind the reader that the discuss..n in the preceeding several paragraphs ass med a degree of apward pr.e adiustment we has not been observed. In the remainder of this study we adhere to a fixed monthly price of $5.00 17 far maximum cable broadcast service allowed by the FCC rules. @ Plus $1.50 für semord television sets in % of househő „28. One other reminder may be in order. Sire we are considering prices and costs in 2 terms, subscription rate at about the rate in reases in the month.y prices generally will not fir·rease of cons met rtrad. t subscript.n rates cannot be adtusted. *ur. Eservation that [Tha |