PT111 · S3 · Q24 Tony: A new kind of videocassette

The retail price of a movie (if you bought a physical copy of the movie from Best Buy) is totally out of scope. We are comparing rental stores who buy the old kind of videocassette to rental stores who buy the new kind of videocassette.

This allows us to say, "Sure Anna, we have to pay a royalty fee for every new copy, but we already have to buy new copies because we've got worn out old copies we need to replace. So since we're paying the royalty fee either way, wouldn't it make sense to buy the cheaper new kind of cassette instead of the old kind?" If this were the last time we had to buy a replacement sure. But if we're eventually going to wear out this copy and then have to replace it too, then that's where Anna's logic beats us. If we end up buying a new style cassette, and then we rent it and it wears out and we need to buy a replacement for that, then we will have wasted money (because now we'll be paying the royalty fee yet again, whereas if we had bought an old style cassette as our replacement it wouldn't be warn out yet).

The argument has nothing to do with customers buying movies, nor do we ever talk about what fraction of the retail price the rental price would be. This argument isn't about what customers would buy; it's about which type of cassette rental stores should acquire to rent out to customers.

Whether tapes wear out because they're rented by lots of people and watched once or rented by a smaller group of people but watched multiple times makes no difference. However, it happens, tapes wear out. This doesn't help us decide whether we should replace those worn out tapes with the new style or the old style, and certainly isn't responding to Anna's royalty comment at all.