MICROECONOMICS SUPPLY AND DEMAND 1
MicroeconomicsSupply and Demand
Netflix is theleading Internet TV offering content in the form of feature films,documentaries, and original series. Netflix boasts of over 70 millionmembers in almost 200 countries (Netflix, 2016). The site providesentertainment free of commercials.
The demand formovie rentals has increased over time. This is reflected by thesteady rise in revenue obtained from movie rentals in the course of2013-2015. For example, the company grossed over $6 billion in 2015compared to $4 billion in 2013 (Netflix, 2016). However, the decisionto hike prices for movie rentals has decreased the demand. The pricehike has reduced the number of expected subscribers by as much as 1million people. Creative destruction contributed to this drop as thecompany split its Internet-streaming and DVD services. However,Netflix still dominates 36% of the market share (Netflix, 2016). Thiscan be attributed to the simplicity of the site and its avoidance ofcommercials.
Netflix has anincredible market throughout the world. The demand for TV series andmovies has increased worldwide due to the proliferation of theInternet. Therefore, many consumers prefer to stream online ratherthan buy or even rent movies. The insatiable demand for movies hasled Netflix to increase its supply networks. As discussed, Netflixhas over 70 million subscribers. The company has increased itsnetworks so as to cater to the huge demand for online movies and TVseries. Consequently, the global coverage has exceeded originalestimates. For example, Netflix undertook international expansion in2010 to South American and European countries (Caporaso, 2014). Thecompany was responding to heightened demand in other parts of theworld. Netflix had to diversify its supply to fit local demand. Thisrequired the company to offer additional content in Spanish, French,and Portuguese. The company has also undertaken further expansioninto Asian countries so as to cater for international demand.Granted, the company has been barred by few countries such as Chinaand North Korea (Caporaso, 2014). Currently, Netflix provides onlinestreaming content in the form of movies and DVD rentals to aninternational audience.
PriceElasticity of Demand
Price elasticityof demand refers to the measure of the responsiveness of supply of acommodity to changes in pricing. The price elasticity of Netflix canbe obtained by dividing the rate of change in customer demand to therate of change of price increases. Netflix anticipated a reduction of1 million in subscriptions upon raising the prices of movie rentalsby 60% (The Week, 2011). This shows that Netflix has an inelasticdemand. An increase in prices of movie rentals is accompanied by alesser reduction in membership subscriptions. The price elasticity ofdemand for Netflix can be obtained by considering the $16.99 pricefor a monthly subscription (Caporaso, 2014) summed over the total of1 million new subscribers per month. Constant changes in price andactive subscriptions will modify the dynamics of the Price Elasticityof Demand.
Consumer responsiveness is affected by several factors such asavailability of substitutes, brand loyalty, duration of price change,and degree of necessity. Netflix faces immense competition from otherproviders such as Amazon and Hulu Plus. Therefore, a small increasein prices will lead to a higher PED as consumers turn to cheaperproducts. The simplicity of Netflix has also guaranteed certainclients despite the changes in price. Netflix implemented changes inpricing for a three-week period (Grover & Edwards, 2011). Thisrelatively short time prevented the company from having a higher PED.Many households have developed a deep reliance on Internet TV.Therefore, these households will always maintain their subscriptionsdespite the changes in prices. A high PED will move the firm tomaintain current prices. Therefore, it leads to a steady rate ofrevenue.
Caporaso, T. (2014, May 5). The Effects of Supply and Demand onNetflix Pricing Strategies. Retrieved fromhttp://www.sdcexec.com/article/11442396/netflixs-pricing-strategies-are-bound-by-the-same-laws-of-supply-and-demand-that-affect-every-other-commercial-entitys-rates
Grover, R. & Edwards, C. (2011, October 10). Netflix retreatsfrom plan to split DVDs from web streaming. Retrieved fromhttp://www.bloomberg.com/news/articles/2011-10-10/netflix-retreats-from-plan-to-split-dvds-from-streaming-business
Netflix. (2016). Retrieved from http://ir.netflix.com/
The Week. (2011, September 16). Netflix`s price-hike exodus: By thenumbers. Retrieved fromhttp://news.yahoo.com/netflixs-price-hike-exodus-numbers-115300848.html