South-Western College Publishing - Economics  
'Star Wars' and Cola Wars
Subject Equilibrium
Topic Monopolistic Competition
Key Words Marketing, Sponsorship, Royalties, Licensing, Incentive, Earnings, Brand
News Story

Even before "Star Wars: Episode I - The Phantom Menace" opened, related merchandise was flooding stores and the media was in a frenzy. This was part of a carefully orchestrated marketing campaign.

Pepsi, for example, is sponsoring the trilogy of movies for $2 billion. The toy company Hasbro Inc. has a licensing deal with Lucasfilm, guaranteeing an estimated $500 million in royalties from the sale of products such as Anakin Skywalker Podracer. Lego Group also has licensed merchandise. The incentive for such firms is that Star Wars is a quality consumer brand that will produce earnings. Pepsi expects to sell millions of cans of soft drinks bearing "Phantom Menace" characters.

(Updated July 1, 1999)

Questions
1. Assume each movie (or series of movies like Star Wars) is established as a separate company.
  a)Why does the market for movies approximate monopolistic competition?
  b)What gives a movie a brand image? What is the brand image of Star Wars?
  c)How does the brand image affect the demand curve for watching Star Wars movies?
  d)How do contracts with Pepsi affect the demand curve for watching Star Wars movies? Why?
  e)Draw a diagram showing the demand, marginal revenue, and average total and marginal cost curves for the Star Wars movie company. Illustrate the effects on the equilibrium price, attendance, and profit, of contracts with firms like Pepsi.
2. Companies like Pepsi have contracts with Lucasfilm to use Star Wars characters in their marketing.
  a)What does Pepsi hope will happen to its average and marginal revenue curves?
  b)What will happen to its cost curves?
  c)What will be the effect on its profit?
  d)Why is Pepsi willing to pay $2 billion for the rights?
Source Stuart Elliott, "The Hype Is With Us," The New York Times, May 14, 1999.

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