Hollywood screenwriters negotiate a new agreement with movie producers stipulating that they will receive 10% of the revenue from every video rental of a movie they authored. They have no such agreement for movies shown on on-demand television.
a) When the new writers’ agreement comes into effect, what will happen in the market for video rentals—that is, will supply or demand shift, and how? As a result, how will consumer surplus in the market for video rentals change?
b) Consumers consider video rentals and on-demand movies substitutable to some extent. When the new writers’ agreement comes into effect, what will happen in the market for on-demand movies—that is, will supply or demand shift, and how? As a result, how will producer surplus in the market for on-demand movies change? Illustrate with a diagram. Do you think the writers’ agreement will be popular with cable television companies that show on-demand movies?