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

Question

2. 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

In this pricing strategy the cost of providing the service by Netflix remains same but the income level and audience increases. Since the subscription plan for 4 screens is $13.99 per month i.e. double of that of 1 screen but the audience gets 4 screens if they pay double. This attracts higher profits even when the cost of providing the service is same. 4 screens with an ultra-high definition is an attractive and profitable option than 1 screen with standard definition especially when the audience is paying half the amount for it.

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