Smart Phone Co. is a monopoly offering wireless voice, data, and text messaging service.

Costs: The fixed cost of operating the network is $5Bn per month. Marginal costs are zero.

Demand: There are 100m potential customers. Of the 100m potential customers 30 million are serious texters and 70 million are casual texters. Serious and casual texters both value unlimited voice and data at $50 per month. Each serious texter has the following individual demand curve for text messages (where Q is in text messages per month, and P is in dollars per text):

30 million Serious: Qs = 1000 10,000 Ps -------- Ps = $0.10 Qs/10,000

Similarly, each casual texter has text message demand

70 million Casual: Qc = 400 4,000 Pc -------- Pc = $0.10 Qc/4,000

Pricing: Smart Phone Co. currently offers unlimited voice and data for $50 per month. To send text messages, customers must buy either a limited text messaging plan (plan L), or an unlimited text message plan (plan U):

> Plan L costs an additional $TL per month for up to 400 text messages per month.

> Plan U costs an additional $TU per month for unlimited text messages.

a. What $TL and $TU should Smart Phone Co. charge and what are resulting profits?

b. In 2015 Smart Phone Cos customers all join WtApp and start texting for free using their unlimited data. All customers drop the text messaging plans. Smart Phone Co. stops offering separate text messaging plans and offers a single unlimited voice, data, and texting contract. What should it charge? What are profits?

c. How do profits in (b) compare to (a)? Explain.

d. Internet companies such as Google and Netflix are advocating for net neutrality rules that would prevent Smart Phone Co from blocking Wtapp on its network. How much would Smart Phone Co be willing to spend on lobbying to stop net neutrality regulation so that it can legally block Wtapp from its network?