Firstly, the central concepts of game theory will be explained briefly. This will hopefully lead to a deeper understanding of oligopoly which, in turn, will be helpful to uncover the oligopolistic structure of the SVOD service industry. Then, implications on the primary SVOD services, such as Netflix and Amazon Prime Video, Hulu (partly owned by Disney), Disney+, and HBO Max (owned by Warner Bros. Discovery) will be pointed out.

The SVOD service industry comprises a monetisation model based on a consistent source of revenue gained from in most cases monthly subscription rates offering customers an unlimited catalogue of video content such as TV shows, documentaries, and movies.

According to Cowen and Tabarrok (2018, pp. 291), “we call an industry that is dominated by a small number of firms an oligopoly”.

In this context, ‘product heterogeneity’, the variation and diversification among goods or services that are made available, is highly important. Since oligopolistic structures lead to few firms supplying the market with similar products, heterogeneity is progressively limited, with significant impact on market dynamics and customer choice.

Game theory postulates that in case of limited product heterogeneity, firms have to still differentiate to some degree in order to compete. Amazon Prime Video and Netflix pose a good example of SVOD services with slightly different product catalogues. On Netflix, you can only stream movies and TV series, whereas an Amazon Prime Video subscription is embedded in a broad portfolio including other options such as Amazon Prime Music or Prime Delivery. Furthermore, the library of Netflix includes renowned and in-house productions whereas the library of Amazon Prime Video is not as extensive and often relies on external productions. Also, Netflix limits the downloads to their monthly subscribers whereas Amazon Prime Video offers single downloads separately paid for by customers, with some exclusive content for subscribers.

Game Theory provides a framework for market models with limited competition. According to Cowen and Tabarrok (2018), Game Theory models strategic decision-making emerging in situations where players interact (pp. 291). Its implications are widely applied to decision-making in any significantly interactive situation. Thus, findings could be generalised to study war, romance, or business decisions of all kinds.

In order to understand the concept of oligopolies, Game Theory provides some fruitful insights: “In a competitive industry, no firm can influence the price, so a competitive firm has no incentive to reduce output. In an oligopoly, each firm is large relative to the total size of the market. Thus, a firm in an oligopoly has some influence over the price and therefore has an incentive to reduce output and increase price from the competitive level” (Cowen and Tabarrok, 2018, pp. 299). According to Perloff (2018), unlike the small companies in Adam Smith’s world, monopolistic or oligopolistic firms can influence market outcomes and therefore hold what economists call market power.

One model of Game Theory that can illustrate decision-making when two parties are each aiming for their own self-interest is the prisoner's dilemma. Two individuals suspected of a crime are separately interrogated without any possibility of communicating.. Both have the option to cooperate or to cheat on one another while each decision results in serious consequences for both parties. Mathematically, the best result can be achieved, if both parties decide to cooperate and stay silent. However, the individual incentives lead to both usually turning on one another and, as a result, facing a maximum sentence. The prisoner's dilemma, therefore, illustrates the conflicts between individual and social reasoning. It can be seen as the negative counterpart of the ‘invisible hand’. Social interest can be achieved through the pursuit of self-interest if the right rules are applied which is the case with the invisible hand. With the wrong rules, however, the pursuit of self-interest can result in an unintended and unwanted outcome (Cowen and Tabarrok (2018), pp. 296).

Since governments have put forward laws, rules, and regulations to prevent direct price agreements (‘formal’ or ‘explicit collusion’) between firms in order to impede cartelisation, firms in an oligopolistic market structure face a similar dilemma, where they cannot communicate directly but hold a common interest of maiximising their individual revenue. Hence, a phenomenon described as implicit or ‘tacit collusion’ (lat. tacid: silent) arose, where firms follow an unspoken agreement in order to reach higher prices and therefore better results for all parties concerned. ‘Conscious parallelism’ occurs when “supracompetitive prices are achieved without express communication” (Harrington, 2012), e.g. two petrol stations with close proximity where one raises their pieces on a supracompetitive level and the other one follows shortly after (and vice versa in case of price undercutting and thus re-establishing competitive prices). A ‘concerted action’ is conducted, when supracompetitive prices are achieved through direct communication of intentions but not explicit price agreements, therefore residing within “the gray area of what is legal and what is not” (Harringtonn, 2012).

When looking at the SVOD industry, forms of conscious parallelism seem to have emerged. Each firm must consider their competition when developing their own price strategy and simultaneously keep a watchful eye on the price and product development of their competitors. Even though more explicit forms of price-related communication can only be speculated upon, there has been an observable call for concerted actions within the SVOD industry concerning the carbon impacts of video streaming (Stewart & Schien, 2023).

Since in an oligopoly few firms with more or less market power dominate a large share of the market and a complex strategic interaction often arises. Within the SVOD industry, the larger firms mentioned above (p. 1) share the vast majority of the market. A higher entry barrier arises due to high sunk costs (i.e. investments in tech infrastructure, licenses, contracts, and maintenance of servers, data, and platform content). Disney+ is an example of being in control of the key resources and input (as they provide majorly Disney-produced content) whereas Netflix and Apple later followed in offering in-house productions to their subscribers. Therefore, it could be initially argued that there is sufficient competition leading to an increase in heterogeneity of content.

However, as content production becomes more efficient, costs can be subsequently lowered, which supports the concept of economies of scale being applicable to SVOD platforms. The average cost of producing a unit of output decreases as the quantity of produced output increases. Streaming platforms offer unlimited access to their content. This initially promotes an increase in product heterogeneity, as each firm has an incentive to produce more, new and relevant content. Though, over time heterogeneity decreases as content has to be produced more quickly and in large amounts leading to a depletion of time for creative processes.

In conclusion, many questions arise concerning the future of content production in general, and within the SVOD industry in particular. In an article by Khomami et al. (2023) in the Guardian, the current state of Hollywood film and tv writers’ pay is controversioally discussed. People behind the production of video content are currently on strike demanding better pay and job security from companies such as Universal, Paramount, Walt Disney, Netflix, Amazon, and Apple. According to the article, some of the strikers express their concerns about the upcoming use of artificial intelligence (AI) as streaming services had tried to divorce their writers by replacing them with innovative technology. This seems logical due to the pressure of accelerating content production and demand. However, the strikers claim to know best how to connect to an audience which in itself underlines their stand on creativity and empathy as a key values within creative industries.

In support, the article claims writers to have suffered financially during the TV streaming boom, partly because of shorter seasons and smaller residual payments. According to WGA statistics, half of TV series writers now work at minimum salary levels (one-third in 2013-14). This seems to be a consequence of increasing pressure on SVOD companies to compete with content as current subscriber numbers of Netflix are decreasing (Sweney, 2022) after the boom during the COVID-19 pandemic.

According to Cowen and Tabarrok (2018, pp. 317), a network good increases in value with more other people using that specific good (i.e., online social media platforms). If you want to share content about your favorite music with your friends, you are more likely to use the social media service that your community is on.

Further Cowen and Tabarrok (2018, pp. 317) explain that within the market of network goods, you would find them to be sold by monopolies or oligopolies. Additionally, when the network is important and valuable, the best service and product may not always become dominant within the market. Thus, the competition for network goods is “for the market” rather than “in the market”, implying that competition for the market can dethrone market leaders very quickly, so leading firms must take into account potential (future) competition.

This is linked to a current change in customer behavior that can be explained by the theory of innovation and creative destruction by the economist Schumpeter, claiming innovation to be far more important than price competition (see Marshall, 2014). This renders competitors out of date and can also lead to creative destruction (meaning supersession of established products by innovation alongside technological advancement). Due to unlimited access to streaming content, consumers now tend to binge-watch their favorite TV-Series online rather than wait for their next episode to appear on scheduled Channel-TV.

Schumpeter also describes the phenomenon observable within the SVOD service industries, that process innovation results in developing more efficient production processes and thereby lowering costs.

The hypothesis of a shift from medium-specific content towards content that flows from many channels and thus being convergent in its nature (Jenkins, 2006) has been applied to Netflix as an example of SVOD by Veen (2014). 

Cowen, T. & Tabarrok, A. (2018). Modern Principles of Economics, (4th ed.). Macmillan.

Harrington, J. E. (2012). A theory of tacit collusion (No. 588). Working paper. The Johns Hopkins University, Department of Economics, Baltimore, MD

Khomami, N., Helmore, E., & Beckett, L. (2023, May 3). Hollywood film and TV writers begin rare strike: ‘The dream should pay a living wage.’ The Guardian.

www.theguardian.com/film/2023/may/02/thousands-of-hollywood-film-and-tv-writers-to-go-on-strike

Marshall, A. (2014). Economics: The User's Guide, A Pelican Introduction, by Ha-Joon Chang.

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Perloff, J. M. (2018). Microeconomics: Theory and Applications with Calculus. Pearson.

Stewart, E. & Schien, D. (2023) What the latest research on streaming emissions tells us - about

Netflix. (n.d.). About Netflix.

www.about.netflix.com/en/news/what-the-latest-research-on-streaming-emissions-tells-us

Sweney, M. (2023, May 2). Netflix’s market value tumbles as it predicts subscriber slowdown. The Guardian.

www.theguardian.com/media/2022/jan/21/netflix-market-value-tumbles-as-it-predicts-subscriber-slowdown

Veen, Jurre. (2014, July 18). The Netflix revolution. Media & Business. Retrieved from

www.hdl.handle.net/2105/17675