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.