South-Western College Publishing - Economics  
"Video Killed the Radio Star" - then "DVD Killed the Video Star"
Subject Comparative statics
Topic Supply and Demand
Equilibrium
Key Words Rentals, purchases, revenue, market, sales, consumers, price, producers
News Story

The home video market, including both rentals and purchases, increased 4.3 percent in revenue terms in 1999 for a total of $19.4 billion. Disney obtained 30 percent of the market with hits such as Mulan and A Bug's Life. Warner Bros. was second with 19 percent of revenues.

The DVD market grew much faster, from $416 million in 1998 to $1.5 billion in 1999. Time Warner outpaced Disney in DVD revenues. Sales of DVD movies are expected to reach $6.3 billion in 2002, while video sales (excluding rentals) are expected to bring in only $4.8 billion.

The growth in DVD sales will be promoted by an increase in DVD players from 4.6 million in 1999 to 25 million in 2002. Another influence is the fact that the sharp video and dynamic sound, among other things, lead owners of DVD players to buy an average of 22 DVD movies a year, while video consumers buy only six movies a year. Also, the price of DVDs is expected to fall steadily from $23.90 in 1998 to $19.91 in 2002, bringing it closer to the lower price of VHS movies. These trends are inducing film producers to issue more old and new films on DVD.

(Updated June 1, 2000)

Questions
1. Draw a diagram of the market for DVDs, showing the demand and supply curves and the equilibrium price and quantity.
  a) The number of DVD players possessed by consumers is increasing. What effect will that have on the equilibrium price and quantity? Illustrate on your diagram.
  b) Consumers like the sound and picture quality of DVDs. How will this affect the equilibrium price and quantity of DVDs? Again, illustrate this on your diagram.
. c) Movie producers are increasingly willing to issue films in DVD format. Show the implications of this on your diagram.
2. The price of DVDs is expected to fall over the next few years. Given what you have drawn in response to Question 1, how do you explain this phenomenon?
3. DVD consumers buy many more DVDs than video consumers buy videos. How would you explain this? Refer to the determinants of demand.
Source Keith L. Alexander, "DVD sales energize home video market," USA Today, April 20, 2000.

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