Tuesday, August 16, 2011

Synchronized Rate Increases in DVD Rentals and Wireless Service

            On the heels of Netflix’s rate increase for hard copy DVD access, Redbox has responded with an increase of 15-20% in selected markets, so far; see http://www.homemediamagazine.com/redbox/redbox-expands-higher-dvd-rental-pricing-tests-24784.

            What this tells me is that Netflix provides a price floor for movie rentals.  When Netflix raising the floor, ventures offering a lower price can easily raise their price to the higher, new floor.   Redbox and Netflix have not coordinated on price, nor have they conspired to fix prices.  However, one venture’s unilateral action to raise prices results in almost immediate increases by a so-called competitor.  In the antitrust/competition policy vernacular this is called conscious parallelism.

            We see conscious parallelism at gas stations all the time.  And not matter how much AT&T protests to the opposite, we see the same behavior in U.S. wireless service.  Netflix and Redbox have implicitly decided not to make price the key differentiator when means of access will suffice, i.e., driving to a Redbox kiosk versus receiving a DVD in the mail.

            Similarly U.S. wireless carriers have implicitly decided not to emphasize price competition when differentiation in terms of handsets and advertising will suffice.  The carriers vigorously claim how tirelessly they have to compete for our business.  But price is not the key differentiator. 

            If the carriers go too far in this strategy they in effect make the argument that a cellular minute of use is fungible, i.e., indistinguishable regardless which carrier provides service.  In a market with fungible products and services, AT&T Wireless can hardly make a credible argument that acquiring T Mobile’s market share will further enhance the value proposition and special worth of an AT&T Wireless minute of service.

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