After you have studied Economics in the News on pp. 376–377, answer the following questions.

a. Why did Amazon buy MGM?

b. How will Prime’s cost curves (MC and ATC )

change with the acquisition of MGM?

c. How do you think Prime’s lineup including the MGM catalog influences the demand for other firms’ streaming services?

d. Explain the effects on Netflix and other firms in the market for video streaming services of the availability of MGM movies on Prime.

e. Draw a graph to illustrate your answer to part

(c). Explain your answer.

f. What do you predict will happen to the markup on streaming services?

g. What do you predict will happen to the excess capacity in the market for streaming services? Explain your answer.

Transcribed Image Text:

Video streaming services started when YouTube launched in 2005. Amazon Prime started its streaming service in 2006, Netflix changed from being a DVD rental service to video streaming in 2007, and Hulu launched in 2008. Over the next 12 years, more than 200 other firms have entered the video streaming market, and a massive amount of content has become available. We can understand the growth of offerings in the market for video streaming services and Amazon's decision to acquire MGM, reported in the news article, by using the monopolis- tic competition model. Figure 1 shows the situation faced by Amazon's Prime streaming service. (Some of the numbers are assumptions, but they are ballpark realistic.) The demand curve, D, and marginal revenue curve, MR, slope downward because Prime has a monopoly on the Price and cost (dollars per month) 25.00 20.00 15.00 12.99 8.99 5.00 Amazon Prime's economic profit 100 MR ATC D MC 200 300 400 Quantity (millions of subscribers) Figure 1 Amazon Prime Making an Economic Profit