Last week, you learned the concept of
“elasticity”. This week, you will evaluate and discuss its relevance
as you compare and contrast two real-world decisions by two different
companies.
Case 1: In July 2011, Netflix implemented a plan to
split up its DVD + instant streaming plan into 3 separate plans: (1) DVD only,
(2) streaming only, and (3) DVD + streaming. The price for the DVD + streaming
plan would be raised from $10 to $16. The rate hike caused a loss of subscriber
base to the tune of 1 million [reported in the following article in the Huffington Post” http://www.huffingtonpost.com/2011/09/15/netflix-price-increase-subscriber-loss_n_964026.html ]
and a huge drop in the share price of Netflix. The company defended its decision and implemented the change
nonetheless.
Case 2: Around September 2011, Bank
of America announced that, beginning in early 2012, it would start charging its
customers $5 a month for using their debit cards [the following is an article
from the Christian Science monitor: http://www.csmonitor.com/Business/2011/0930/Debit-card-fees-Why-Bank-of-America-will-charge-5-for-debit-card-use.
Following the tremendous backlash from credit card holders, the company
abandoned its plans and did not implement its new fee.
Required:
Compare and contrast the two cases. What elasticity considerations would Netflix and BankAm have considered in their
individual decisions? Why did they react differently to essentially similar
customer responses?