Question

Tomorrow is the big football game between the University of Texas in Austin and the University of Oklahoma. As always, the game will be played in Dallas, which is halfway between the schools. For many years, the Oklahoma Boosters Club of Austin, Texas, has rented a billboard over the freeway in Austin for a few days and posted a huge sign making fun of the Texas team. The new owner of the billboard faces a business decision now, as the Oklahoma Boosters want to rent it again: should he let them rent it, which would bring in some revenue and make use of a billboard that would otherwise remain vacant (no revenue), or should he tell them no? The billboard represents a fixed cost––he paid for building it and for renting the land on which it stands. His total variable cost is tiny––pasting a large piece of paper on the billboard, much smaller than the total revenue he will receive from the Oklahoma Boosters. It seems like an easy decision––rent out the space and increase profits. The owner is not doing it, however, because he is thinking about longer-run profits: “I hate to turn down business, but . . . I don’t need to give people (Texas fans who provide most of his business) reasons not to do business with me.” If the man also owns billboards in Dallas, how and why might his decision about putting anti-University of Texas ads on his boards there differ from his decision about the billboard in Austin?

Answer 1

If the man owns billboards in Dallas he might agree to putting anti-University of Texas ads on his boards because in Dallas he is not facing the same problem he faced in Austin,Texas. In Austin,Texas most of his customers are Texas fans and an anti-University of Texas ad can cut into a big portion of his revenue and the profit from the ad does not offset the loss in revenue. But in Dallas,his customers include both Texas fans as well as Oklahoma fans. An anti-University of Texas ad might even boost the number of customers who are Oklahoma fans and revenue arising from that additional business itself will mostly offset the loss in revenue from reduction in number of customers who are Texas fans. And on top of that the man gets additional ad revenue as well. This is why his decision about putting anti-University of Texas ads on his boards in Dallas differs from his decision about the billboard in Austin.