Economics of Video Rental

There's an interesting story (subscriber-only content) about Blockbuster Video in today's edition of The Wall Street Journal. Unfortunately it's subscriber-only content. (But browse around, you might find most of it.)

The summary is that Blockbuster, after having previously announced the closing of some 1,000 locations is raising the number to 1,560 - almost 40% of its total. What’s the reason? Things change.

Specifically, the market has changed. New competitors (specifically Netflix and Redbox) can deliver the same product cheaper. And substitutes (online viewing and on-demand films) are becoming more widespread.

There are a number of interesting concepts that can be teased out of the basic story: entrepreneurship, economic growth, and utility.

For entrepreneurship, I would direct you to Schumpeter's five entrepreneurial activities: new products, new production methods, new sources of resources, new markets, and new forms of organization. Ask your students how firms like Netflix and Redbox fit the definition and, by extension, become competitors to firms like Blockbuster.

For economic growth, I would again refer you to Schumpeter. His idea of 'creative destruction' was meant to be an explanation of economic growth. New products and services replace old ones. But you may also look at growth as providing new goods and services to consumers or existing goods and services at a lower cost (thus increasing real income).

Finally, the idea of utility is something we frequently skip or skim over. But it is the measure of usefulness that a product provides to the consumer: essentially how does something satisfy wants? I was taught that there were three types of utility: form, place and time. Form utility means the product has a form that the consumer finds satisfying; place utility means it's available where it can satisfy the consumer's wants; and time utility means it's available when the consumer wants it. First ask students "what forms of utility did Blockbuster provide to consumers?" Then ask them to identify the utility added by firms like Netflix and Redbox.

I'm sure there are more concepts you can link to this story.  Please share your ideas and your comments.