Question

In: Economics

Netflix sells a subscription service to 2 types of customers: hardcore movie-watchers who usually watch 10...

Netflix sells a subscription service to 2 types of customers: hardcore movie-watchers who usually watch 10 movies a month and value the service at $50 a month (or $5 per movie), and casual movie-watchers who usually watch 5 movies a month and value the service at $20 a month (or $4 per movie). There are an equal number of customers of each type. Which of the following pricing strategies generates the most profit for Netflix?

price the subscription as free and charge $4 per movie

price the subscription as free and charge $5 per movie

price the subscription at $10 and charge $4 per movie

price the subscription at $10 and charge $5 per movie

price the subscription at $20 and charge $3 per movie

price the subscription at $20 and charge nothing for each movie watched

price the subscription at $50 and charge nothing for each movie watched

I answered "price the subscription at 10 and charge 5 per movie" but was incorrect

Solutions

Expert Solution

The correct option is a.

a) If netflix charges $4 per movie and charge nothing for the subscription, then casual movie watchers and the hardcore movie watchers both will value the service.

For example, if suppose there are 10 hardcore movie watchers (who watch 10 movies in a month) and 10 casual movie watchers (who watch 5 movies in a month), charging $4 for each movie will help Netflix earn a profit of {(10 * $4) * 10} + {(5 * $4) * 10} = $600. This will be the maximum Netflix can earn. No other price strategy will help Netflix earn so much.

b) Casual movie watchers will not pay $5 for each movie because they value the service at $4 only for one movie. So the demand for the service will decrease if netflix charges $5 per movie.

c) Casual movie watchers who value the Netflix service at $4 per movie will not be willing to pay an additional $10 for subscription.

d) Netflix will lose its casual movie watchers clients if it charges $5 per movie and an additional $20 for subscription. This is because casual movie watchers are only ready to pay $4 for one movie.

Rahul Sunny answered 2 years ago
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