Blockbuster Revisited

My Spring 05 Classes

A couple of days ago I wrote about how competition was forcing Blockbuster to drastically modify its late fee policy. I also commented that I had received a late fee notice from Blockbuster at the same time as I saw the article. I had apparently been late in returning a video in November (probably forgot about Blockbuster's noon deadline and dropped the video off on my way home from work in the evening) and Blockbuster was notifying me that, as a result, I had an outstanding "extended viewing" fee on my account which I was asked to clear by January 4th.

Well, today I took my son to get a haircut in the same plaza where the local Blockbuster is located and, while he was getting his haircut, I paid the fee and brought my Blockbuster account current. However, along with my credit card receipt I was given a coupon for one free rental which effectively refunded my money (ok, I can only spend it at Blockbuster, but, as a family of six, we patronize Blockbuster frequently so it won't go to waste).

This little episode is a demonstration of how profits work in a market economy. As an early and aggressive player in this market, Blockbuster generated significant economic profits. But these economic profits attracted competition with newer and more efficient business models (Netflix and Wal-Mart are the two biggest new entrents) and the competition began eating away at the economic profits driving prices down for all sellers in this monopolistically competative market.

My coupon is but one miscule piece of evidence of this evaporating of economic profits. According to the December 15th Wall Street Journal article I quoted in the December 29th blog entry, Blockbuster could have expected to collect between $250 and $300 million in late fees in 2005. These have now been waived and Blockbuster is now effectively rebating the late fees charged in the past two or three months and this will further cut into their revenues. Add to this the fact that people who rent more than three games (at about $6 each) or four movies (at about $4 each) per month now have the option of paying a flat fee of $17.49 per month for unlimited rentals by mail or $24.99 for unlimited store rentals and you can see why Blockbuster's economic profits are disappearing and their customer's consumer surplus is increasing.

Blockbuster is still a profitable, well run company and the video/DVD/game rental industry will continue to grow. But this industry is rapidly maturing into a stogy established insustry with normal profits and no economic profits to attract many investors looking for areas to start a new business.