31. Netflix to Offer Online Movie Viewing Online movie rental service Netflix ha

Question

31. Netflix to Offer Online Movie Viewing Online movie rental service Netflix has introduced a new feature to allow customers to watch movies and television series on their personal computers. Netflix competes with video rental retailer Blockbuster, which added an online rental service to the in-store rental service. Source: CNN, January 16, 2007 a. How will online movie viewing influence the price elasticity of demand for in-store movie rentals? b. Would the cross elasticity of demand for online movies and in-store movie rentals be negative or positive? Explain. c. Would the cross elasticity of demand for online movies with respect to high-speed Internet service be negative or positive? Explain.

Explanation / Answer

a)

With easy availability of substitute to in-store movie rentals, i.e. with easy availability of online movie rental service, demand for in-store movies will decrease. As a result, elasticity of in-store movie rentals will increase, as any increase in its price will make consumers switch easily to online movies.

b)

Since the two goods are substitutes, their elasticity will be positive.

c)

Since the two goods are complements, their elasticity will be negative.

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