a. Arc Elasticity of demand
Arc elasticity of demand is the elasticity of any given variable and another on two points or on a curve (Allen , 2013).
Having price increasing and quantity demanded decreasing like the case of Netflix, the price changes are from $9.99 to $15.98 yet the change in the quantity demanded is 800 000. Arc elasticity of demand uses mid-points that can be written as:
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Arc Ed = ((Qd2-Qd1)/midpoint of Qd) /((P2-P1)/midpoint of P))
Midpoint of Qd = (Qd1+Qd2)/2 = (800 000/2) = 400 000
Midpoint of Price = (P1+P2)/2 = ($9.99+$15.98)/2 = 12.985
% change in Qd = 800 000/400 000 = 2
% change in price = (9.99 - 15.98)/12.985 = -0.461301502
Arc Ed = 2/-0.461301502 = 4.33556
Therefore, the arc elasticity of demand provides the same values whether prices fall or rise due to mid-points.
b. Regression analysis
Regression analysis explains how two variables are related. It is used to mine an equation in the estimation of the unknown value of a variable and the relationship to a known variable. Following the previous known prices and the quantity demanded of Netflix, regression analysis is used to calculate future prices and the quantity expectation of the subscribers by the Netflix service providers (Chatterjee & Hadi, 2015). Past historical data provides no cause and effect relationship; therefore, some other statistical tools can provide the insight on the regression analysis to be used.
Applications of elasticity of demand
When there is a fall in price of the Netflix services, then total revenue increases. For instance, if the Netflix services charge less in terms of their fees and hence their products, then the demand of the same expands by 4.33556. When the Ped is elastic (>1), then the total revenue of the Netflix products and services increase equally. Nonetheless, when the Ped is elastic (>1) and the firm increases the prices, then the total revenue allocated by Netflix reduces significantly.
Also, when Ped is equal to 1 and the firm raises their prices, the total revenue remains constant. In some cases, when the Ped is a negative and the firm lowers the price by some percentage, the total revenue increases (Owen, 2012) .
Consumers’ equilibrium choice
What the consumer chooses depends highly on the price of the services and the products that Netflix offers. The increase of the prices of both products to $15.98 ($7.99 for both) from $9.99, means that the marginal utility of any dollar spent is low. The income effect looks into how the price changes affect the purchasing power of the consumers (Allen, 2013). It also becomes difficult to substitute the products for another option. In terms of the income effect, the subscribers will have options in reducing their expenditure on other products. The changes occur due to the change in the marginal utility of the prices of the products and the services.
Assessment
The customer dissatisfaction tools help in monitoring possible intentions in repurchasing of the Netflix products and to get the required feedback on where the company is failing. Relevant information is thus received timely and confidence regained. Adjustments for goals and effective plan are forecasted. The process of evaluation and the assessment of the customers is worth it for the betterment of the company in terms of gaining back trust and confidence. The aim also is to ensure that the customer satisfaction index improves. Knowledge on the level of competition from other firms help in the change of the previous strategies undertaken.
In conclusion, the prices charged on the products have a direct bearing on whether the consumers will purchase or not. Hence, focuses on the success of the business. All prices have to cover costs and the resulting profits. Therefore, to have low prices then there is a need for Netflix to reduce its production costs.
References
Allen, W. (2013). Managerial economics. New York: W.W. Norton & Company.
Adhikari, A., Basu, A., & Raj, S. P. (2013). Pricing of experience products under consumer heterogeneity. International Journal of Hospitality Management , 33 , 6-18.
Chatterjee, S., & Hadi, A. (2015). Regression analysis by example. Somerset: Wiley.
Owen, G. (2012). Applying Point Elasticity of Demand Principles to Optimal Pricing in Management Accounting. The International Journal Of Applied Economics And Finance, 6(3), 89-99. doi: 10.3923/ijaef.2012.89.99
