(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 399

374 PART 3 • Market Structure and Competitive Strategy

E XA MPLE 10.4 THE PRICING OF VIDEOS
During the mid-1980s, the number of households
owning videocassette recorders (VCRs) grew rapidly, as did the markets for rentals and sales of prerecorded cassettes. Although at that time many more
videocassettes were rented through small retail outlets than sold outright, the market for sales was large
and growing. Producers, however, found it difficult to
decide what price to charge for cassettes. As a result,
in 1985 popular movies were selling for vastly different prices, as you can see from the data in Table 10.2.
Note that while The Empire Strikes Back was selling for nearly $80, Star Trek, a film that appealed to
the same audience and was about as popular, sold
for only about $25. These price differences reflected
uncertainty and a wide divergence of views on pricing by producers. The issue was whether lower
prices would induce consumers to buy videocassettes rather than rent them. Because producers
do not share in the retailers’ revenues from rentals,
they should charge a low price for cassettes only
if that will induce enough consumers to buy them.
Because the market was young, producers had no
good estimates of the elasticity of demand, so they
based prices on hunches or trial and error.9
As the market matured, however, sales data
and market research studies put pricing decisions

TABLE 10.2

on firmer ground. Those studies strongly indicated that demand was price elastic and that the
profit-maximizing price was in the range of $15 to
$30. By the 1990s, most producers had lowered
prices across the board. When DVDs were first
introduced in 1997, the prices of top-selling DVDs
were much more uniform. Since that time, prices

of popular DVDs have remained fairly uniform and
continued to fall. As Table 10.2 shows, by 2007,
prices were typically in the range of $20. As a
result, video sales steadily increased up until 2004,
as shown in Figure 10.9. With the introduction of
high-definition (HD) DVDs in 2006, sales of conventional DVDs began to be displaced by the new
format.
Note in Figure 10.9 that total dollar sales of DVDs
(conventional and HD) reached a peak in 2007 and
then began falling at a rapid rate. What happened?
Full-length movies became increasingly available on
television through the “Video On Demand” services
of cable and satellite TV providers. Many movies
were available for free, and for some, viewers had
to pay a fee ranging from $4 to $6. “On Demand”
movies, along with streaming video on the Internet,
became an increasingly attractive substitute, and
displaced DVD sales.

RETAIL PRICES OF VIDEOS IN 1985 AND 2011
1985

2011

TITLE

RETAIL PRICE ($)

TITLE

VHS

RETAIL PRICE ($)
DVD

Purple Rain

$29.98

Tangled

$20.60

Raiders of the Lost Ark

$24.95

Harry Potter and the Deathly Hallows, Part 1

$20.58

Jane Fonda Workout

$59.95

Megamind

$18.74

The Empire Strikes Back

$79.98

Despicable Me

$14.99

An Officer and a Gentleman

$24.95

Red

$27.14

Star Trek: The Motion Picture

$24.95

The King’s Speech

$14.99

Star Wars

$39.98

Secretariat

$20.60

Data from Nash Information Services, LLC ().

9

“Video Producers Debate the Value of Price Cuts,” New York Times, February 19, 1985. For a study of
videocassette pricing, see Carl E. Enomoto and Soumendra N. Ghosh, “Pricing in the Home-Video
Market” (working paper, New Mexico State University, 1992).