Question

Blockbuster Video was founded in 1982 (back in the days before the internet) as a place where consumers could rent videos. It wasn’t long before Blockbuster became the largest video chain in the U.S. and was earning above-normal profits. Yet in January of 2015, Blockbuster went out of business. Why couldn’t Blockbuster maintain its above-normal profits? This is not a research question – a full credit answer will discuss the general concept involved here. It is not necessary to give specific details about Blockbuster’s business.

Answer 1

Usually, when a new product is introduced in the market, and there is high demand, the company makes super normal profits. However, other firms observe this opportunity and start entering this market. With time competition increases and the market becomes a perfect competition market. In a perfect competition market, profit = 0, and the firm is not able to sustain its business. Also, other firms may develop their technology and provide the same service at lower costs. In such a scenario Blockbuster would be out of customers and hence out of existence.