DVD or Wait

Film companies can increase their revenues by releasing higher-priced DVD's before lower-priced videocassettes.

I went to Best Buy to get my friend a movie for her birthday. I was able to find the movie on DVD, but I could not find the videocassette version. I asked one of the employees where I could find the movie on videocassette, and he told me that the film company would not be releasing the videocassette version for another month.

It does not take a lot longer to produce a videocassette than it does to produce a DVD, so why does the film company wait so long to release the movie on videocassette? It is a way for the film company to practice price discrimination. By offering the more expensive DVD version of the movie a month in advance, the film company is able to distinguish between high-price and low-price buyers.

Some potential purchasers of the movie will not mind paying the higher cost of the DVD ($29.99) in order to obtain the movie quickly or because of the higher quality that the DVD offers. However, the low-price buyers will only be willing to buy the movie when it is offered for a lower price, despite the longer wait.

Because the DVD version of the movie is the only one available for a whole month, the customers who are not willing to wait for the cheaper videocassette version of the movie ($15.99) will go ahead and pay the higher price. Then, a month later, when the movie is released on video cassette, the customers who are only willing to buy the movie at a lower price will be able to obtain a copy of the movie in their price range. By using this form of price discrimination the film company is able to charge higher prices to those customers who have a less elastic demand for the movie, and charge lower prices to the customers with a more elastic demand for the movie. This enables the film company to maximize their net revenue.