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Wednesday, December 12, 2007

Blockbuster's answer to Netflix

So, I considered getting netflix because as movie-afficionado, I can't stand the selection of movies available at most blockbusters, ESPECIALLY in Colorado Springs! I did the math of how many movies I could have out at a time and how often I'd receive new ones in the mail, etc. It came out to not be worth it to me simply because I liked having the availability to simply just go to the movie rental place and pick something up!

Because Netflix seemed to be doing so well, and they were only firm in the industry offering online rentals, Blockbuster would enter the industry. But more on that in a minute.

Netflix, essentially with monopolistic power in the industry of online movie rentals, was able to charge a price higher than equilibrium price, and they'd make money... in fact, profits! Blockbuster, seeing the profits to be made in the online movie rental industry, entered the industry. Eventhough netflix had monopolistic power, there was nothing actually preventing blockbuster from entering the market. This entrance created a duopoly, specifically something similar to Cournot scenerio. But, Blockbuster, wanting to edge the competition out, thus working to be the stronger of the two firms, instead of trying to undercut the prices offered by Netflix creating a Bertrand market, decided to implement a strategy of allowing movies that otherwise would have been mailed back in, to be turned in at the store and exchanged for a free in-store acquisition of a movie.

I liked this, as a consumer, so I decided to sign up with Blockbuster online! I got my needs met as for selection and receiving movies in the mail, AND I was able to satiate my taste for being able to just pop in to the store and grab a movie (as a selection exchanged in person instead of via mail).

In the conceptual diagram, not only did Blockbuster take some of the business away from Netflix by entering the market, they also modified the market by implementing a new policy that would allow them to become the dominant firm. This, a stackelberg model of Nash economics, meant that Blockbuster would simply charge a price for their product WHILE taking into consideration what their competitions, Netflix, reaction function would be. And in so doing, they would control the majority share of the online movie rental industry.

I, as a consumer, took full advantage of the process in the early stages of Blockbuster's entrance into the market. I was able to get 3 movies at a time via mail for only 20 dollars a month. Exchanging these movies immediately after I watched them allowed for me to consume as much as 9-12 movies per week! To me, the unit price of the movies was about 40 cents a movie. I was in hog heaven!

Once Blockbuster was in a Stackelberg position, they turned inward and considered their own profit-maximizing dynamics. Because customers, like me, were establishing a demand curve of some pretty high consumption at a low rate of unit cost, Blockbuster changed their prices. The demand curve was an outgrowth of the market and so the numbers chosen by Blockbuster became something along the lines of fewer movies allowed out at a time and at higher rates! I opted with the 18 dollars a month for 1 movie via mail at a time. I still consumed about 4 movies a week (16/month) and at a rate of about 90 cents per movie. To me, I am still getting a dynamite deal! Plus, Blockbuster is making more money, AND there is no way for Netflix to compete because they have no stores to appeal to customers like me.

In theory, since Blockbuster is now a monopoly in the industry, I can expect prices to go up even further. But until it gets to a point that I'm not willing to do business with them, OR until a rival business enters the market (which would be difficult considering the already established locations of stores), I will continue to enjoy many movies and Blockbuster will continue to enjoy my money!

Within 4 years of this blog, Blockbuster went out of business, replaced by Netflix and the availability of online streaming of movies... Not just to tvs, but to phones and tablets!

Also, Blockbuster was replaced by Redbox for physical rentals...

So maybe Blockbuster WON'T be getting my money...
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