FIN 605-003: Microeconomics Analysis of Netflix Pricing and Market

This case study examines the microeconomic aspects of Netflix's pricing strategy. It begins by identifying Netflix's market structure as an oligopoly and then analyzes the impact of price increases on subscriber numbers, highlighting the concept of price elasticity of demand. The analysis explores how the company's decision to unbundle its services and the subsequent price adjustments led to potential subscriber losses, while also considering the negligible impact of marginal costs on individual customers. The study further discusses Netflix's competitive landscape, including rivals like Apple, Amazon, and Hulu, and how the company's investments in content acquisition and development play a crucial role in retaining and attracting subscribers. The document concludes by summarizing the challenges and potential outcomes of Netflix's pricing changes, including the effect on the company's profit levels and share price.

Running head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
Author note

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Introduction
The market structure of Netflix is oligopoly. It is a public company of America that
mainly delivers subscription-based and internet-based streaming media, contents of television on
internet, film distribution and video content production (Hinterhuber and Liozu 2017). As the
price charged by Netflix for services increased, the company may lose millions of subscribers.
The discussion analyzes current state of marketing strategy of Netflix taking into consideration
different aspects related to marketing strategy.
Analysis
Netflix may lose about 1 million subscribers due to new pricing plan. The company
increased the price of the existing services. As the demand for Netflix service reduced because of
increase in price, the demand for the service can considered to be relatively elastic with respect
to price (Lyons 2016). The effect of marginal cost on individual customer is very negligible.
There will be no such change in marginal cost of the company. Netflix provided popular service
of DVDs in the mail and stream video over the internet at $9.99. The plan has unbundled and
provides only one of services at $7.99 a month. More existing customers of Netflix will shift to
only streaming plans (Nagle and Muller 2017). Hence, the company may avoid postage costs.
The number of DVD only customer will reduce to 800,000 whereas the streaming only customer
will increase to 200,000. The discrimination and price increase may result in loss of subscribers
for the Netflix. Netflix is expecting that 12 million of its users will avail both the plans.
Therefore, the subscription cost will be higher for them. The share price of the company fell to
$169.25. There are many competitors of Netflix in the market such as Apple, Amazon and Hulu
LLC. Whether, the subscribers move to any other service provider or not depends on the type of
subscription offer, price of service (Nagle, Hogan and Zale 2016). The service provided by the

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other service providers should be at per with Netflix to attract customers. To retain existing
customers and attract new customers Netflix is planning to invest huge amount in content
acquisition and development of new shows. The innovative content and shows of the Netflix
attracts subscribers from USA as well as the world. Though, the company loses some of its
subscribers due to increase in price. They get some of its customers back as the service they
provide is absolutely value for money. The company should focus on more commercial free TV
series and movies. They should try to improve and focus more on linear networks, DVD
watching, pay per view content, other internet networks, web browsing, video piracy and
magazine reading. The expansion of business internationally will enable the company to generate
more profit. The customer base of the company will go up and steadily increase their operating
profit and help in balance growth.
Conclusion
The change in price plan may lead to customer lose for Netflix. The lower demand may
lead to decrease in profit level and share price of the organization. The company unbundled the
existing plan thus the price increased for the individual plans. Some customers moved to other
service providers. However, the quality of service provided by Netflix attracts the customer back
from other service providers.

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Reference List
Hinterhuber, A. and Liozu, S.M., 2017. Is innovation in pricing your next source of competitive
advantage? 1. In Innovation in Pricing (pp. 11-27). Routledge.
Lyons, D.A., 2016. Usage-based pricing, zero-rating, and the future of broadband innovation.
Free State Foundation Perspectives, 11(1).
Nagle, T.T. and Müller, G., 2017. The strategy and tactics of pricing: A guide to growing more
profitably. Routledge.
Nagle, T.T., Hogan, J. and Zale, J., 2016. The Strategy and Tactics of Pricing: New
International Edition. Routledge.