Question

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.”

Addendum from the lecturer: They increased the prices to $9.99, $13.99 and $17.99 respectively from 1st July 2017. And in 2019 they increased the premium plan to $19.99, while leaving the other two prices constant.

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 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

Netflix conducted the price test to know how responsive the consumer demand is for a product based on its price, which is exactly what price elasticity concept tells.

Now the fashion in which company is raising prices i.e, Meagre rise in basic plan (from 8.99 to 9.99) and exponential rise in standardplan (from 2 to13.99) is somewhat not digested by customers because they might be those customers which are just starting or are trying various options as is visible from  constant prices  for the year 2019. We can conclude that demand is perfectly elastic in this case

The continuous rise in premium plan shows the loyalty of customers towards the service ...here it can be said the demand is relatively  inelastic

The concept of price elasticity ranges from perfectly elastic, relatively elastic, unit elastic, relatively inelastic to perfectly inelastic. Where,

Perfectly elastic is where a any very small change in price results in large change in qty demanded. There is no meaningful brand attachment and no product differentiation.

Relatively elastic is where small change will result in large change in demand

Unit elastic is change in price is matched to change in qty demanded

Relatively inelastic is where change in price cause small change in demand. Products with stronger brands tend to be more inelastic

Perfectly inelastic are goods whose change in price does not result in change in qty demanded because the customer has no other option to go buy the product from. Seen mostly in cases of firms with monopoly.

There are various determinants which affect the price elasticity such as

availability of substitutes - Is a product has close substitutes then it's demand is elastic and vice versa

Proportion is consumer's income spent - the greater the income spent the greater will be the elasticity

Complimentarity - ( not in the above case) if two goods are consumer simultaneously ..rise in price of one will have an effect on demand of other good.