Question: The producer of a movie has sole rights to make DVDs of it and is thus a monopolist in that particular movie. Assume that Blockbuster Video also has a near-monopoly on retail rentals. The producer could charge Blockbuster $85 for the DVD and let it choose the rental price. Producers found, however, that it is more profitable to charge Blockbuster a low rate to purchase the video (about $8) and then require it to send them 40 to 60 percent of the gross revenue on rentals of that DVD. Explain why the revenue-sharing scheme is more profitable for both parties than the alternative.
a. For what types of movies do you expect that the producer will insist on receiving 60 percent of the revenue rather than 40 percent? Explain.
b. Might your previous answer be related to characteristics of the audience, for example, the importance of a younger and more computer-literate demographic that can more easily obtain illegal copies?