Question

Read the following article:

Netflix customers in Australia could soon be facing steeper monthly charges. The popular streaming service on Monday confirmed that it recently tested higher subscription prices for new customers in Australia. The company—which has nearly 100 million global subscribers and expanded to Australia in 2015—has reportedly tested raising prices for new subscribers by as much as three Australian dollars (AU). Netflix’s test resulted in some Australian customers seeing price increases for the streaming service’s Basic plan (going from AU$8.99 to AU$9.99 per month), while Netflix’s Standard plan increased AU$2 to AU$13.99 and the Premium plan increased AU$3 to AU$17.99 per month, according to The Australian. Netflix confirmed the tests, but emphasized that it has not yet formally announced any permanent price increases. “We continuously test new things at Netflix and these tests typically vary in length of time,” the company said in a statement. “In this case, we are testing slightly different price points to better understand how consumers value Netflix. Not everyone will see this test and we may not ever offer it generally.”

Lecturer’s note: These price increase ‘tests’ became the permanent new prices in June 2017, and were followed by price increases in the US later in 2017.

Discuss why you think Netflix conducted this test and what you think they found from that test based on their later decisions.

Refer in particular to concepts from the Week 3 lecture topic, such as what price elasticity of demand is and how it is calculated and used, its relationship with revenue, and relevant determinants of price elasticity of demand.

Answer 1

Net Flix conducted this test to estimate the how the quantity demanded responds to the change in the price. This helps in the calculation of price elasticity of demand. Once the price elasticity of demand is calculated the company will infer whether the demand for the product is elastic, inelastic or unit elastic. This will help the firm in calculation of change in the total revenue of the firm with the change in price. If the demand for the product is inelastic, increase in price will lead to increase in the total revenue of the firm and decrease in price will lead to fall in the total revenue of the firm. Opposite is the case if the demand for the product is relatively elastic.

Since, Net flix increased its price it can be inferred that the demand is relatively inelastic as increase in price must be leading to increase in total revenue of the firm.