Netflix has three different subscription plans for streaming video: watch one sc

Question

Netflix has three different subscription plans for streaming video: watch one screen at a time in Standard Definition for $7.99 per month; watch two screens at a time in High Definition for $10.99 per month; or watch four screens at a time in High and Ultra-High Definition for $13.99 per month. The ongoing difference in cost to Netflix between providing the one-screen plan vs. the four-screen plan is essentially zero. How do you explain the wide variety of prices for virtually the same service, given that the cost to Netflix of providing each plan is basically the same?

Explanation / Answer

Netflix must have observed that the product it sells can be categorised into 3 different kind of services with different markets or market segment. We can analyse this situation because we observe that people with standard devices that demand standard definition videos must be belonging to a lower income group and the consumers demanding ultra High definition video streaming must be belonging to a higher income group and the high definition video demanding group must live somewhere in between. Because these three segments of the market have different income levels we expect that they would be having different income elasticities. Resale of the service is obviously prevented because of lack of device to play on. With these two features and the fact that Netflix has some market power, it is able to discriminate the price even though the marginal cost is same for every service. Price discrimination in this case is possible for the reasons given above. The need for price discrimination arises to increase the profits that Netflix could earned from being a monopoly.

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