Questions:
Question 1.
Consider a firm that provides Video-on-Demand (VoD) over IP. It serves a city with 1,000,000 homes. The firm installed servers in the beginning of the year and is now planning to be in operation for 5 entire years. Each server connects 100,000 homes and costs $100,000.
At most 10,000 households watch a video per month and no household watches more than one video per month. Every time a video is exhibited, the firm needs to pay $1 to the content owner. The firm knows that every additional dollar in the price of a movie reduces consumption in 1,000 movies and that demand can be linearly approximated. All movies sell at the same price.
a) Write the demand curve for movies over VoD per month and the monthly total cost curve for this VoD provider
b) Assuming the firm is a monopolist in this market, how many movies will it sell per month and at what price? How much profit does the firm make? How much is consumer surplus? How much is the deadweight loss?
Assume now that there is another firm that competes in the market. This firm has the same structure of fixed costs but enjoys a different contract with the content provider: it pays 25% of the price per movie exhibited. Both firms sell exactly the same movies (competition with an homogenous product).
c) In this scenario of competition, how many movies does each company sell per month and at what price are the movies sold? How much profit does each firm make? Explain your reasoning assuming that the firms compete on price.
Question 2.
Assume now that people talk about the movies they watch and therefore the willingness to pay for a particular movie is a function not only of the movie characteristics, such as quality and price, but also of the people's awareness. Also, recall that the cable company providing the VoD service must acquire the content from the content providers and can probably negotiate with them how much to pay every time a movie is watched over VoD.
a) Discuss how, as a manager of the telco that provides VoD service, you would promote new movies in this VoD platform and why. Are there any network externalities in this market that as a manager you need to account for? If so, which and what would you need to do about them?
b) Also, are there any aspects of 2-sided markets in this case that you would like to account for? If so, which ones and how would you, as a manager of the VoD platform, use them in your favor? What can you say about the dynamics of demand in this industry?