V.O.D. Wars

by Elaine Schwartz    •    Sep 27, 2010    •    692 Views

Usually, for an average of 120 days, theaters have an exclusive right to show a movie. Then, for about $4.99 we can use video-on-demand to see it on television. It sounds simple but so much more is happening.

It all relates to competition. The first step was preventing us from copying V.O.D. rentals. Also, timing is crucial. With DVD sales plummeting, the studios would like theaters to have a shorter exclusive showing period. Then, Hollywood could generate revenue from a $24.99 premium V.O.D. for new movies available at home after 45 days. Of course theater owners object.

You can see who is competing here and how. The movie theaters and the movie studios are competing with each other through non-price competition. Also though, competition continues within the movie theater industry and within the movie studio industry.

The Economic Lesson

While we theoretically can place business firms in four basic market structures, actually, we have a market continuum along which firm behavior becomes increasingly less competitive.  At the left end of the scale is perfect competition where many small firms with little power have their prices controlled by demand and supply in their entire market. At the other end is monopoly where the firm has considerable price making authority. In between are monopolistic competition and oligopoly.

Defined as many small to medium sized firms that are similar and yet have a unique characteristic, monopolistic competition is next to perfect competition on the continuum. Next, with markets composed of 8 to 12 dominant firms who have some price making capability, we have oligopoly.

Where on the competition continuum would you place movie theaters? Movie studios?




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