Competition for Disney in the market of merchandise licensing is not very high because they have significant market product. This market could be categorized as a competitive monopoly, there are relative barriers to entry and each firm produces a highly differentiated product. The key to this market for Disney is creating movies that generate interest in their licensing market. The primary dimension that competitors compete is not focused on price but rather market power or consumer demand. By creating demand for their specific products firms are able to charge high prices to consumers who are looking for a good with the firm’s specific brand. For these consumers there aren’t substitutes and they are less price sensitive. Other firms can respond to competitors prices but since price is not the primary dimension that firms compete the effect is negligible.

In the market for intellectual property licensing. Disney is the largest firm of which there are many competing firms such as Coca-Cola, Broadcast Music Inc., Time Warner Inc., and Getty Images Inc. The market that is being focused on is merchandise license of which Disney is dominant but followed by toy makers Hasbro and Mattel who make Barbie, GI Joe, and Transformers. It is important to note that Disney gets these companies to bid for the right to manufacture Disney’s licensed products.

Barriers to entry in this industry are low because it does not require much capital to license products. The difficulty lies in establishing a brand name and having effective product promotion for a completely new patented or trademarked product. Barriers to success are possibly high marketing costs as it is critical to establish a strong brand and an effective promotional strategy. Technology has made marketing cheaper and more effective but in the industry established brands are more likely to succeed in licensing and selling new products. This is because they have established a loyal consumer base and achieved strong economies of scope. There are perhaps a couple hundred competitors but it is difficult to approximate the number of merchandise licensers in the industry because there are many small licensors but few that are close to Disney’s size.

Product differentiation is the most important factor in this market. Product differentiation enables Disney to charge a higher price because consumers want to buy Disney products that are marketed through a variety of media forms. This market structure is heavily monopolistic because Disney is not a price taker, has dominant market power, and can prevent arbitrage because its products are trademarked and licensed. Disney gains market power by creating and acquiring a wide range of licensed content. For example, Disney bought LucasArts which holds licenses for Star Wars merchandise. Disney releases a new Star Wars movie which serves as marketing for Star Wars merchandise. Disney, in the last 10 years, has acquired Pixar, Marvel, and LucasArts, giving it even greater market share for licensed merchandise. Buy owning so many properties and differentiating their products Disney can effectively price their licenses.

In this market, Disney has a unique pricing situation. Disney doesn’t manufacture the majority of its licensed products. Instead Disney gets Hasbro and Mattel to bid for the right to manufacture Disney’s products. Under this arrangement Disney does not have to break into the manufacturing business and can realize higher profits. Disney instead takes a cut from the licensed merchandise that Hasbro and Mattel sell for Disney. Since Disney products have such a strong brand and are sought after by consumer Hasbro and Mattel are willing to take smaller cuts to have the rights to manufacture the merchandise. The typical licensing company will take a 10 percent cut but since Disney has so much market power they tend to take 18 percent of the toy sale revenue.

Disney does not directly take place in the selling of merchandise so there is not a price strategy for them. However, Mattel and Hasbro employ second degree price discrimination because they cannot identify a specific customer’s demand before purchase. This discrimination is achieved through versioning, coupons, and bundling. Versioning allows the firms to offer variations of merchandise that adjust for the consumer’s willingness to pay. Coupons provide deals for people who have a lower willingness to pay. Bundling gets consumers to buy more than they would if there was only one product.

Disney’s licensing situation with Hasbro and Mattel means that there is not a real strategic interaction with Hasbro and Mattel. This is because Disney informs both companies that they have a product line and that they would like one of the firms to manufacture and sell the merchandise. Hasbro and Mattel both know that the licensed merchandise are going to be in great demand and that they can charge higher prices because of the differentiated product. This does lead to a strategic interaction between Hasbro and Mattel because they bid against each other.

Hasbro and Mattel each have two options, bid high or bid low. Bid high means that they will take a smaller cut of sales to receive Disney’s licenses. For example Hasbro bids 82 percent meaning that Disney takes an 18 percent cut. Bid low means that they will take a larger cut for themselves which means more profit for them. For example, Mattel bids 88 percent meaning that Disney only takes a 12 percent cut. In this situation Disney is inclined to accept Hasbro’s offer and reject Mattel’s offer. If both firms bid high, they both lose because Disney will pick one and profits will be lower. If one firm bids high and the other bids low then the high bid gets the licenses but makes lower profits. If both firms bid low then Disney picks one and profits are higher for whichever firm is picked. For each firm the dominated strategy for securing the license is to bid low while the dominant strategy for both firms is to bid high. Therefor the Nash equilibria occurs when both firms bid high.

This can be visualized two ways, the first looks at it in terms of winning and losing the contract. However, this does not fully capture the fact that only one of the firms can land the rights for the licenses. The second table illustrates each firm’s chances of landing the licenses in terms of percentages. Low profit means that Disney takes a larger cut and high profit means that Disney takes a smaller cut.

Looking at the second table, it can clearly be seen that Hasbro’s dominant strategy is to always bid high or take the lower profits. Mattel’s dominant strategy is also to always bid high or take the lower profits. This makes the Nash Equilibria bid high or take lower profits. If one chose to bid low and the other bid high then there is a 100 percent probability that the low bidder loses and the high bidder wins. If both choose low bid or both choose high bid then it becomes even. At this point the firms can try to woo Disney with special offers that could be things such as free marketing or other perks. Disney could also ask both firms to keep bidding until Disney selects the better offer. The key to this game is that both firms recognize that lower profits from a high bid are better than no profits because they could not acquire the license from Disney.

As it is Disney does not have to engage in a bidding war for their license but that could change if Hasbro and Mattel were to merge. This also happens to be a concern of management. If this happened Disney would have to actually negotiate its own licensing cut but strategic interaction would still not be as important because the Disney brand is so strong. If Disney didn’t like the price that Hasbro-Mattel offered Disney could easily work with several other merchandise manufacturers to get their product onto shelves. Disney’s market power and differentiated products are of high value to manufacturers because of the prices that can be charged. This means that Hasbro-Mattel may get Disney to take a smaller cut, but it would not be significant because Disney’s business is better than no business. Disney can ensure cooperation by continuing to acquire more licenses and create new properties this will maintain their market power in the competitive monopoly. This occurs because their highly differentiated products create relatively inelastic demand that is desirable for manufacturers to take advantage of.