The Market for Video on Demand

In spite of predictions to the contrary, video on demand service has yet to become a significant channel for distribution of audiovisual entertainment to consumers’ homes. In this paper, we examine the market for video on demand service under the assumption that quality of service is a threshold factor that consumers take into consideration when making their purchasing decision. Given this characteristic of consumer behavior, we model the joint demand for video on demand service and broadband network access. We then proceed to characterize the optimal solution to monopolist and duopolist content providers’ price and quantity decisions in this market. The comparative statics results are extended in a two-period game theoretic framework that addresses the timing issue of service adoption.