Question

Read the following article: Netflix Tested a Price Hike in Australia (FORTUNE) By TOM HUDDLESTON JR. May 15, 2017

(https://fortune.com/2017/05/15/netflix-price-hike-australia/)

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.”

Your task: 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, 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

Answer: Netflix conducted this test to verify their market and consumer.Netflix wanted to see price-sensitivity of consumer and their response to change in goods price or in other words quantity demanded to changes in goods own price.It shows how much price chnages affect chnages in quantity demanded.

Price elasticity of demand can be calculated from the following formula:

% change in quantity demanded/%change in price

When PED greater than 1,demand is elastic.This can be interpreted as consumer can be very sensitive to changes in price.A 1% increase in price will lead to a drop in quantity demanded of less than 1%

When PED less than 1,demand is inelastic.This can be interpreted as consumer can be insensitive to changes in price.A 1% increase in price will lead to a drop in quantity demanded of less than 1%.

Price elasticity of demand relationship with revenue mentioned below:

PED is inelastic (<1) and a firm raises its price Total revenue increases

PED is elastic (>1) and a firm lower its price. Total revenue increases.

PED is elastic (>) and a firm raise its price. Total revenue decreases.

Relevant determinants of price elasticity of demand are:

(a) The availibity of close subsitutes: If product has many close subsitutes,then people tend to react strongly for price increase.

(b) The importance of a product's cost in one's budget: Suppose if product X is very inexpensive, consumers are relativelty indifferent about price increase.Therefore product X has a low price elaticity of demand.Now,suppose product Y is a expensive good.So 10% increase in price make the difference whether people choose to buy product Y or not.Therefore, product Y have a higher price elasticity of demand.

(c) The period of time under consideration:Price elasticity of demand is greater if you study the effect of a price increase over a period of two years rather than one week.Over a longer period of time,people have more time to adjust to the price change.