374 PART • 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 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 $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 (http://www.thenumbers.com) “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)