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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?
a. Price discrimination between demanders. High demanders are willing to pay a high price for a plan that includes many channels. Low demanders aren’t, and are only willing to pay a low price for a relatively smaller number of channels.
b. There is less demand for, and more supply of, the one-screen plan so its equilibrium price is low. There is more demand for, and less supply of, the four-screen plan so its equilibrium price is high.
c. Price discrimination between demanders. One-screen plan purchasers are high demanders since they must value the smaller set of channels more than it they had a larger selection of channels they did not want. Four-screen plan purchasers are low demanders since there are many channels in the plan that they likely never watch.
d. Netflix is making the common mistake of trying to gain market share at the expense of maximizing profit. Offering a cheap one-screen plan is meant to entice buyers, but these buyers would usually pay the four-screen price anyway, since Netflix’s streaming video service has no close substitutes.
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