In 2008, the nation’s only two satellite radio providers, Sirius Satellite Radio and XM Satellite Radio, merged into a single firm. Together the two firms had 14 million subscribers, each paying $13 per month for dozens of channels, most of which are free of advertisements. Both firms were losing money as they struggled to get enough subscribers to cover their substantial fixed costs. The cost of the infrastructure to set up a single system—satellites and ground stations—is about $2 billion. In addition, both firms added to their setup costs by signing contracts with radio personalities, news organizations, and sports information sources. One possible advantage of a merger was that the new firm could have a lower fixed cost per subscriber and thus could earn a profit. One possible disadvantage was that the new firm might charge higher prices.

Two years later, the new firm, Sirius XM, earned its first quarterly profit of $14.2 million, compared to a loss 1 year earlier of $245.8 million. The firm became profitable—just barely—by increasing the number of subscribers to 19 million and thus lowering its cost per subscriber. In other words, the merger transformed two unprofitable firms into a single profitable firm.

There was some concern that the merger would increase prices. Consumers choose from five packages of stations, including a limited set of stations for $10, the original Sirius stations for $13 (the same price as before the merger), a package that combines the original Sirius stations and a subset of the XM radio stations for $17, and a complete package for $19. In other words, the merger did not increase the price of the original Sirius package, but gave consumers more options for lower-priced and higher-priced packages.

Question.

When does a natural monopoly occur?