Problem I: European markets for DVDs There are several markets in which a "hardware-software" linkage is important. This difficulty examines supply and demand forces for an emerging market, namely, digital video disks or DVDs. The DVDs are the software and DVD players are the associated hardware. The dynamic evolution of the DVD market has attracted a great deal of attention in the popular press and from market analysts.
Estimated market demand for DVDs in the European market (EU) is given by
Qd = 1400 - 125P + 20N,
Where P is the price of a DVD in Euros, Q is quantity measured in thousands of DVDs, and N is the number of DVD players sold to date. Supply of DVDs in the EU market is estimated to be
Qs = 300 + 75P.
a. Suppose that N=10. As a result, current demand for DVDs is Qd = 1400 -125P +
20(10) = 1600 - 125P. Calculate the equilibrium price P* and quantity Q* in the EU market for DVDs.
b. Suppose again that N = 10. At a given price of P = 8, determine if there is a shortage or surplus in the market for DVDs and calculate the size. Also, calculate the total expenditure of consumers for DVDs at a price of P = 8.
c. At a given P = 8, calculate the number of DVD players (N) that would have to be in
consumers' hands in order for the DVD market to be in equilibrium at a price of P = 8. Explain, in words, how changes in the number of players (N) impact supply and demand in the DVD market.
d. Suppose that N = 10 (as in part a above) and that the market for DVDs is in equilibrium. In the following year, the number of players is expected to increase to N2 = 20. An increasing portion of the EU market for DVD players, however, is expected to be supplied by imports from Asian producers. As a result, there is strong pressure on government officials to restrict imports by imposing a quota on the number of players that can be imported into the EU market. In the event a quota is imposed, the number of players will only increase to Nquota = 14.
Explain how the two above scenarios will impact equilibrium in the market for DVDs. In other words, calculate the equilibrium price and quantity for the following year when (i) there is no import restriction and (ii) the quota is imposed. Compare prices and quantities across the two scenarios.
e. Under the assumption of part d., discuss how the trade policy for imported DVD players will affect the market for DVDs. Do you expect suppliers of DVDs, such as music, motion picture and computer game providers, to support or oppose the trade policy? Explain.
f. Discuss the dynamic evolution of the markets for DVDs. Please be sure to draw on the idea of substitutes and complements. Frame your discussion by comparing two possible paths, one in which the installed base of DVD players grows rapidly and one where it grows slowly. Does this market exhibit a network effect? Explain.