Chapter 12, Problem 1E

To determine

To state:

The market structure suitable for movie production companies along with the reasons why they would have subsidiary studios.Also, whether the movies that have come out under the Disney name and Touchstone name are different.

Answer to Problem 1E

The market structure that best describes the movie production companies is oligopoly.

Studios having subsidiaries helps them maximize profits and have above normal profits in the long run.

The movies that have come out under the Disney name and Touchstone name are not different.

Explanation of Solution

The market structure that best describes the movie production companies is oligopoly. It is because there are only a few players in the market that account for most or all of the production. Oligopoly is characterized as follow.

Oligopoly:

1. few sellers exist
2. products may be differentiated or homogeneous
3. most of the industry output is by a few firms
4. there exists advertisement and selling costs
5. strategic interdependence of firms
6. there exist natural or technical barriers to entry
7. kinked demand curve due to interdependence among firms
8. A price decrease is followed by the competitor, but a price increase is not followed.
9. Supernormal profits

The studios D, MGM and U have subsidiaries so that their market share hold over the market as large as possible. It helps them maximize profits and have above normal profits in the long run.

The movies that have come out under the D name and T name are not different. The movies produced under both banners are similar and have similar quality contents.

Economics Concept Introduction

Oligopoly:

Oligopoly is a market structure where only a few sellers exist, and products may be differentiated or homogeneous.