Showtime for Netflix

Since Blockbuster and Wal-Mart will also lower their prices, Netflix's demand and marginal-revenue curves will look like straight lines. Also, when Netflix cuts its piece, its sales will increase only modestly, because Blockbuster and Wal-Mart will follow the price cuts to prevent Netflix from gaining an advantage over them. Nevertheless, if Blockbuster and Wal-Mart will match Netflix's price cut but will ignore a price increase; then, this reaction will cause Netflix's demand curve to be kinked and the marginal-revenue curve will have a vertical break, or gap. Moreover, economies of scale cause the entry barrier in the Web-based DVD-rental market. The Big Four companies have sufficient scale and sales; therefore, any new firm that will enter the market will have a small market share, and will not be able to survive competing will Netflix, Blockbuster, Wal-Mart, and Amazon.com.…