Question

In 2011, Netflix customers’ service fees increased by 60%. Netflix discontinued a subscription offering DVD rentals and unlimited video streaming for $9.99 per month; DVDs and streaming would be separated, with each costing subscribers $7.99 a month ($15.98 for both). This strategic decision occurred as video streamed via the Internet was slowly replacing discs. However, now customers wanting both services had to juggle two accounts, and Netflix lost around 800,000 subscribers. Assume that you are director of product pricing at a firm offering a video streaming platform that allows subscribers to view and download content over the Internet. Competitors are currently producing substantially the same product as your firm—video streaming services only. You have realized that, to remain competitive, your company must both continue adding content and move into areas of new and original content. Current profit margins, based on an annual subscription cost that is uniform across all markets, will not cover fixed costs associated with moving into original film production.

To finance new original movies, you are considering revisions to your firm’s pricing structure, and you have invited senior executives together to present your ideas. Using the analytical framework described in Chapters 3 and 4, you are asked to provide convincing evidence of the need to revise subscription rates, and to demonstrate the conditions under which a decision to revise prices would increase the net benefit to the firm, of current and future subscriptions, by performing the analyses described in the Tasks. Responses should be 200-400 words.

TASKS

As the Director of Product Pricing:

Explain how regression results and arc elasticity measures can be used to derive measures of elasticity, which can then be used to estimate demand.

Across (a) personal and (b) business users of this product (assuming that business users have more inelastic demand), apply own elasticity of demand as a quantitative tool to forecast changes in revenues, prices, and/or units sold.

Assess how differences in elasticity regionally or across interest groups could change a consumer's equilibrium choice in response to changes in prices and income.

Answer 1

In real terms, regression is used to find out the relation between the dependent and independent variables.  It is commonly used for the valuation of assets and to understand the relationship between the variables.  Let us consider the example of commodity prices and business stocks which are handling these kinds of products. Regressions are mainly of two types namely multiple and linear. Independent variables are used in case of linear regression, on the other hand, a minimum of two independent variables are used in case of multiple regression.  The price elasticity of demand can be seen as the responsiveness of the percentage change in demand resulting from the variation in the prices.

When we deal with the video streaming organization, in order to determine the demand, both of these concepts can be utilized. Firstly, regression can be used in order to determine the change in the relationship between the increased price and the number of subscription. With the help of basic regression equation Y = a + bX, where Y is dependent variable, subscriptions. While a is a constant and b represents the coefficient which is being factored by X which is mainly the independent variable i.e. cost. From this regression analysis, it is quite clear that price determines the number of subscription and thus avoiding various other elements such as authentic content. Own elasticity avoids all the other elements apart from volume change.  With the help of price elasticity, the quantity demanded of a certain product is divided by the cost or price change.  It is expected that if there is a decline in the price , there will be an increase in the demand and vice versa.

           In fact, over various regions and groups, there will be  a variation in the elasticity as there will be  change in the variable which can affect the demand. For instance, population shifts, social changes , availability of substitute products, technological advancement and political issues.  Similarly, the change in h supply will also affect the consumer equilibrium but in case of video streaming service, the variable will not be affected by the supply changes. The equilibrium will be influenced by the oh variables which are resulting from the change in supply and variables which causes a change in the demand.  The supply curve will have upwards direction while demand curve will be downwardly and both will intersect each other which is called equilibrium point.