Chapter 4: Elasticity

Start Up: Movies On Demand

Imagine going to your favorite coffee shop and having the waiter inform you the pricing has changed. Instead
of $3 for a cup of coffee, you will now be charged $2 for coffee, $1 for creamer, and $1 for your choice of
sweetener. If you pay your usual $3 for a cup of coffee, you must choose between creamer and sweetener. If
you want both, you now face an extra charge of $1. Sound absurd? Well, that is the situation Netflix customers
found themselves in—a 60% price hike to retain the same service in 2011.

In early 2011, Netflix consumers paid about $10 a month for a package consisting of streaming video and
DVD rentals. In July 2011, the company announced a packaging change. Customers wishing to retain both
streaming video and DVD rental would be charged $15.98 per month, a price increase of about 60%. In
2014, Netflix also raised its streaming video subscription price from $7.99 to $8.99 per month for new U.S.
customers. The company also changed its policy of 4K streaming content from $9.00 to $12.00 per month that
year.

How would customers of the 18-year-old firm react? Would they abandon Netflix? Would the ease of access
to other venues make a difference in how consumers responded to the Netflix price change? The answers to
those questions will be explored in this chapter: the change in quantity with respect to a change in price, a
concept economists call elasticity.