An article in The Economist XXXXXXXXXXdescribes how a hot issue for movie studios in Hollywood is whether to sell DVDs of new movies to cheap rental suppliers, such as Netflix and Redbox, on the same...

An article in The Economist (2010) describes how a hot issue for movie studios in Hollywood is whether to sell DVDs of new movies to cheap rental suppliers, such as Netflix and Redbox, on the same day as they make them available for sale to the general public. (Netflix sends DVDs through the post, and Redbox rents them from kiosks for $1 per day.) And the studios have made different choices. Fox, Time Warner and Universal make Redbox wait 28 days before making the DVDs available to them, believing that cheap rentals will undermine more profitable DVD sales and rental-on-demand; whereas Disney, Paramount and Sony make them available immediately. The article suggests that the choice the movie studios are making is whether to earn a lot of revenue from a small number of customers, or a small amount of revenue from a large number of customers. a How does the choice that movie studios make relate to the trade-off a firm faces when it can only choose a single price for its output? How does price discrimination allow a firm to relax this trade-off? b How does the choice of whether to sell DVDs of new movies to the cheap rental services on the same day as making them available for public sale relate to the concepts of price discrimination and versioning? What must be Disney, Paramount and Sony’s beliefs about consumers’ preferences for them to decide it is not worth making Netflix and Redbox wait 28 days to obtain DVDs of new movies?