Name: Naga Thejus S M (890326-4235)

IY2593 Managerial Economics

Assignment 1

Part 1
1. C
2. C
3. C
4. D
5. C
6. D
7. C
8. A
9. C
10. D

Part 2
Netflix is a subscription-based online media streaming service provider that offers movies, tv series
and shows to over 139 million paid subscribers worldwide, generating approximately $16 billion in
revenue in 2018.
From a start, the company revolutionized the business model of DVD rentals, and later moved on to
make inroads in online media streaming with high-quality contents, both by co-producing with major
movie studios and making its own original production. From successful series such as House of
Cards, Orange is the New Black, Stranger Things, and The Crown, Netflix has become a serious
contender at Emmy and Golden Globe Awards with its many nominations. This year, Roma is
nominated at the 91st Academy Awards for Best Picture, the most prestigious honor in the movie
industry.
In many ways, we can see that Netflix is a firm with an innovation and a clear strategy. However, due
to its increasing focus to produce and secure distribution rights of new additional contents, especially
to cater to local consumer tastes, Netflix is committed to raise $2 billion in debt over the coming
years to finance these projects.
Answer the following in detail:
1) Drawing from Chapters 1-5, explain the goals of Netflix as a firm, what its products and
customers are.

The company Netflix was created in 1997, and its main business model back then was to use
the internet technology to enter into the movie rental business, and thereby catering to its
customers (Netflix’s subscribers) with the latest collection of movies to choose from for
rental. The customers could log on to Netflix’s website and order the latest movie DVD’s
which was sent to their doorstep using postal service. And once they finished watching it,
they mailed it back. From 2007 Netflix started with the option of online streaming of some of
its rental movie content to its subscribers (L. Hosch, n.d.). Nowadays it is a household name
for a media streaming service which allows the subscribers around the world to watch the
 high-quality media content (movies, TV series, and shows) in high definition with a
subscription fee starting as low as 9 USD.
Considering the company’s background and its dynamic business model we can deduce
Netflix’s goal as follows:
 To bring in profit and maximize it using profit maximization hypothesis by
considering factors such as technological advancement, capital, production, gestation
period of the product, etc.)
 Market domination by increasing its market share in media streaming business by
offering high quality media content at affordable prices than its competitors.
 Technological innovation in the services they offer to their subscribers to increase the
user experience.

2) Do you think the demand for its product is elastic or inelastic? Why?

We can define Elasticity as sensitivity of the change in the demanded quantity (of a product)
to its price change. As a rule of thumb, we can consider that the demand for necessity goods
is considered inelastic while for luxury goods to be elastic (Keat, Young and Erfle, 2014 ,
pp.94-119). I would consider Netflix to be a luxury good and hence I expect its demand to be
elastic. To confirm this let us consider the available data online on Netflix.

The first graph shows the history of the Netflix’s subscription, plan price changes for its
Basic, Standard and Premium options (Richter, 2019):

Figure 1: Netflix plan price change between 2014- 2019 (Richter, 2019)
The second graph shows the growth in Netflix subscribers between 2013 - 2020 (Netflix:
number of subscribers worldwide 2020 | Statista, 2021)

Figure 2: (Netflix: number of subscribers worldwide 2020 | Statista, 2021)

Let us consider the changes between 2014 – 2019 (in order to get valuable data from both the
graphs). Now we can calculate the arc price elasticity using the equation:

∆Q
Q
E p= avg
∆P
Pavg

If we take the average of price of the subscription between 2014 and 2019, we get

P2014 = (7.99 + 8.99 + 11.99)/3 = 9.65 USD

P2019 = (8.99 + 12.99 + 15.99)/3 = 12.65 USD

Q2014 = 58 M
Q2019 = 148 M

148−58
(148+58)/2
E p= = 3.2471
12.65−9.65
(12.65+9.65)/2
 This confirms that the demand is relatively elastic as expected.

3) What will happen to the supply and demand, both short-run and long-run, if 5G network
technology is quickly gaining widespread adoption in many countries within three years from
now? Why? Remember to take into account the huge investment Netflix will be making.

The 5G technology is an next step of 4G in Radio technology evolution. In terms of the

internet speed 5G is at least 10 times faster than 4G and in terms of latency 5G is at least 100
times quicker than 4G, which shall improve the user experience tremendously (5G vs 4G:
What is the difference?, n.d.). This means that the subscriber can view the 4K content on their
hand-held devices seamlessly. This shall have an impact on the market in the long run. But
since Netflix is making a huge investment based on this it can expect a decline in the profit in
the short run as the supply and demand will not change drastically. But with slow adoption of
5G roll out globally it can have a positive look on the long run. In meanwhile if Netflix
decides to source its investment by increasing the subscription fees then it can expect to see a
decline in the number of subscribers due to short run demand.

4) Netflix’s strength has always been its deep knowledge of its customers’ needs and how quick
it adapts to them. This is, in part, due to the vast amount of real-time data it can gather from
each viewer.
If you are a consultant for Netflix, and you are given a task to create a new model to estimate
the demand for the sequel of the hit tv series “Breaking Bad,” what variables will you include
in the model? Why?

Considering that Netflix has access to the fine data of its subscribers it is easier to create a
model using Machine learning by considering the variables such as
 Total number of viewers for “Breaking Bad” – as this gives an estimate of how many
active subscribers have knowledge of this series
 Total number of viewers who watched this series completely – as this says if this
series can get the subscriber hooked on to it from start till end.
 Geographical location of the viewers – to see which part of the world this show is
well reciprocated and if there is chance to influence the global audience even more
 The ratings for this show by the subscribers – as this give the rating of the show
which is a major factor to consider.

References:

 Ericsson. n.d. 5G vs 4G: What is the difference?. [online] Available at:

<https://www.ericsson.com/en/5g/what-is-5g/5g-vs-4g> [Accessed 7 February 2021].
 Keat, P., Young, P. and Erfle, S., 2014. Managerial economics. 7th ed. Pearson.
 L. Hosch, W., n.d. Netflix | Founders, History, Programming, & Facts. [online] Encyclopedia
Britannica. Available at: <https://www.britannica.com/topic/Netflix-Inc> [Accessed 7
February 2021].
 Statista. 2021. Netflix: number of subscribers worldwide 2020 | Statista. [online] Available
at: <https://www.statista.com/statistics/250934/quarterly-number-of-netflix-streaming-
subscribers-worldwide/> [Accessed 7 February 2021].
 Richter, F., 2019. Infographic: A Brief History of Netflix Price Hikes. [online] Statista
Infographics. Available at: <https://www.statista.com/chart/16684/netflix-subscription-
prices-in-the-united-states/> [Accessed 7 February 2021].