Living Economics

DVD or Wait
Candice Lowry
Film companies can increase their revenues by releasing higher-priced DVD's before lower-priced videocassettes.

I went to Best Buy to get my friend a movie for her birthday. I was able to find the movie on DVD, but I could not find the videocassette version. I asked one of the employees where I could find the movie on videocassette, and he told me that the film company would not be releasing the videocassette version for another month.

It does not take a lot longer to produce a videocassette than it does to produce a DVD, so why does the film company wait so long to release the movie on videocassette? It is a way for the film company to practice price discrimination. By offering the more expensive DVD version of the movie a month in advance, the film company is able to distinguish between high-price and low-price buyers.

Some potential purchasers of the movie will not mind paying the higher cost of the DVD ($29.99) in order to obtain the movie quickly or because of the higher quality that the DVD offers. However, the low-price buyers will only be willing to buy the movie when it is offered for a lower price, despite the longer wait.

Because the DVD version of the movie is the only one available for a whole month, the customers who are not willing to wait for the cheaper videocassette version of the movie ($15.99) will go ahead and pay the higher price. Then, a month later, when the movie is released on video cassette, the customers who are only willing to buy the movie at a lower price will be able to obtain a copy of the movie in their price range. By using this form of price discrimination the film company is able to charge higher prices to those customers who have a less elastic demand for the movie, and charge lower prices to the customers with a more elastic demand for the movie. This enables the film company to maximize their net revenue.

  1. Candice Lowry is an undergraduate at the University of Memphis.
  2. Candice Lowry is an undergraduate at the University of Memphis.
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