AVM, a competing studio decides to sell the DVD version of the same movie through Savmart. The manufacturing cost to AVM of a DVD is $3. Savmart retails the DVDs for $16 apiece. AVM charges a wholesale piece of $6 per DVD. Assume that the DVD demand is identical to that of the VHS.
(a) How many DVDs should Savmart order?
(b) AVM wishes to ensure that Savmart always orders the first best quantity (the optimal order quantity for the supply chain). To do so, it is willing to offer Savmart a buy back contract. However, Savmart agrees to such a contract only if the wholesale price does not exceed $4. What are the right prices (wholesale and buy back), if any, that will ensure that Savmart will choose the first best solution?