Netflix\'s price change gives us an opportunity to get insight into the price el
ID: 1134972 • Letter: N
Question
Netflix's price change gives us an opportunity to get insight into the price elasticity of demand. Give a numerical estimate for the elasticity of Netflix subscriptions. There isn't just one way to do this, but some may be better than others. Explain the steps you took to arriving at your answer.
Part of the challenge of working with real-life economic data, is that it is imperfect, and we must often make do with what we have. What kind of data would we need to get a better calculation of elasticity?
US Streaming (millions Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Revenue Contribution Profit Contribution Margin Paid Memberships Total Memberships Net Additions 1026 340 33.1% 41.1 42.3 0.90 1064 344 32.3% 42.1 43.2 0.88 1106 379 34.3% 43.4 44.7 1.56 1161 413 35.6% 45.7 47.0 2.23 1208 414 34.3% 46.0 47.1 0.16 Q3 2016 1304 475 36.4% 46.5 47.5 0.40 Monthly Revenue per Paid Member Percentage Chg. Rev Percentage Chg Memberships $8.33 $ 8.43 8.49 3.9% 8.47 $ 8.75 $ 9.40 4.0% 3.7% 5.0% 7.9% 2.5% 3.2% 5.3% 0.6% 0.9%Explanation / Answer
Price elasticity of demand is responsiveness to a change in price.
Formula is Ped= Percentage change in quantity/ percentage in in price.
In this case. we have percentage change in the number of subscribers but we do not have percentage change in prices charged by netflix.
However, looking at changes in average revenue per user quarterly and change in percentage change of membership it can be concluded that Netflix has elastic demand. Whenever, price change is large quantity demanded has changed by a small amount. (between Quarter 3 and Quarter 4 of 2015) and when price change is small between Quarter 4 of 2016 and first quarter of 2016, elasticty is more.
Similarly in quarter 2 and 3 of year 2016. Hence when netflix has smaller change in price then revenue increases considerably.