In which increased competition raises prices

January 23, 2011

It may sound counterintuitive, but there are situations in which increased competition actually raises prices.

Example 1: when the Kindle launched, Amazon sold Kindle books for $ 9.99. However with the iPad launch, publishers are demanding more and amazon is having to sell Kindle books for $14.99.

Example 2: From an article on Netflix’ clout in Hollywood in purchasing movie rights from studios:

“God save Netflix if Amazon, Google, Apple or Microsoft get in the subscription movie and TV business. Google has more money than God; if Netflix offers $100 million, expect Google to offer $500 million to get it exclusively for themselves.”

Which means that once any of the above players get into movie streaming in a big way, it is quite possible that Netflix will have to charge consumers more for streaming Hollywood content because it’s going to have to pay more for streaming rights.

In the above scenarios, prices are initially low when the distributors (Amazon Kindle, Netflix) have more bargaining power vis-à-vis the content providers. However as more competition comes in (like the Apple iPad), content providers get some of their market power back and prices go up.