Various economic issues are often addressed in journals and newspapers not only in the United States but also in the world as a whole. These issues cover different economic areas such as the government intervention in the market, comparative advantage and trade among many other topics. Price changes is among the major elements that form the basis for discussion in most of the journals (Li, Hardesty, " Craig, 2018). In this regard, this paper focuses on analyzing the government intervention in the market; price floors and price ceilings about the recent issue of price changing made by Netflix Company. It elaborates on how the price changes can impact on the consumers' responses. The other items discussed include the reaction of people to incentives, changes in market equilibrium, an optimal decision made on the margin, behavioral economics and price elasticity of demand.
Netflix Company is the world's leading source of internet entertainment. It has over 100 million members in more than 180 countries in the world. Moreover, there are no limitations in watching the entertainment programs on Netflix. Recently, Netflix Company adopted price changing incentives where the institution decided to raise the monthly price of some of its streaming plan. In this regard, the company's 4K streaming plan which provided higher quality content would cost $14 per month instead of the previous $12 per month. According to Allen, Feils and Disbrow (2014), the increase in the two dollars was associated with subsequent increase in the company’s margin.
Government Intervention in the Market
It is worth noting that every company has a right to set and adopt various price changing policies just like the Netflix Company. However, the government also play its role by intervening in the market majorly through setting price control which are price floors and price ceilings. These price controls are set to control the market equilibrium prices of goods and services in the bid to protect the consumers and ensure that the welfare of the community is given a high priority (Hatfield, Plott, " Tanaka, 2016).
Price Floors
Governments are often determined to set price floors to assist its citizens and protect them from exploitations. A price floor is the lowest price which is often set below the market equilibrium price and allowable by the government. Since a price floor is placed above the equilibrium, it usually leads to surplus production. Consumers are always reluctant to purchasing goods whose prices are higher than the equilibrium market prices. Thus, the commodities will end up not being sold resulting in the surplus. With this policy, producers will only gain if their supply curve is elastic (Hatfield et al., 2016). For instance, in the case of Netflix company, if the government sets a price floor, then the company will only gain if their supply is elastic.
Several strategies are used by the individual government to set price floors and later deal with the effect that may arise after the implementation of the price policy. They can set a production quota, price support or a simple price floor. A production quota can artificially raise the price by either giving producer's incentives to reduce their production or restricting their output by use of mandated quotas. In the US, this technique is widely used especially in the agricultural sector. On the other hand, price support is a minimum price set just like in price floors, but in this case, the excess supplies are bought by the government. However, this method is inefficient and costly to the society and government (Hatfield et al., 2016).
Price Ceiling
Price ceilings refer to the highest price that the government sets at which a seller is allowed to sell commodities. These prices are usually set below the equilibrium price. It should be noted that price ceilings always lead to shortages in supply. This is because when there is a price ceiling, producers are forced to produce less while consumers will always demand for more of the goods and services due to low prices. Therefore, the demand will outstrip supply hence leading to a shortage. It should be noted that when the government sets a price ceiling, companies such the Netflix will produce less due to low prices while its customers will demand more goods and services thus resulting to a situation known as the deficit (Hatfield et al., 2016). As a result of the shortage consumers may be forced to queue up in the line to acquire the good, the government may ration the good, and there might be the emergence of a black market dealing with the commodity. Consequently, these price control methods may cause mixed responses from consumers both negatively and positively.
Consumers' Response to Changes in Prices
With the price change in the Netflix Company, there has been a mixed response from consumers. According to a survey conducted by AYTM, the increase in price has led to the loss of over one million customers and a reduction in stock by 26percent. This fall equates to a drop of over six billion dollars of the net revenue of the company. Indeed, this deterioration in the company's activities provided a clear indication that even the stockholders were not amused by the change in prices made by the Netflix company.
A study was further conducted to find out how the customers felt about the price hike by the company. The statistics indicated that about 89% of the customers canceled their account with the Netflix company because they claimed that the price set was too high. The Wall Street also indicates that the price hike did not amuse consumers. However, despite the account cancellation by customers and the complaints, Netflix has no plans to lower its price structure (Allen et al., 2014).
Consumers' Response to Incentives
Consumers in any market respond differently to incentives since they are rational beings. It is worth noting that the incentives can alter the buying behavior of customers either negatively or positively. In this regard, the Netflix company's customers responded negatively to the price incentive adopted by the company as most of them drifted away from the company and others canceled their accounts. Therefore, companies should consider certain incentives before implementing them as they can either derail or improve a company. In today's economic world, consumer incentives such as shopping or travel gift cards should be adopted as they easily motivate customers to purchase goods or services leading to a greater performance of the business.
Price Changes and Market Equilibrium
Price changes in the market also affect the market equilibrium because there are different responses of consumers and producers to changes in commodity prices. Prices that are lower will discourage supply of goods and increase demand for goods by the consumers. On the contrary, when prices are high, consumers will be discouraged from demanding goods while the producers will be encouraged to produce more commodities. However economic theories suggest that there should be one common price in a free market to influence the equilibrium of the market supply and demand (Li et al., 2018). The price increase by the Netflix Company, for instance, altered the market equilibrium thus discouraging many customers from accessing its services.
Behavioral Economics
In the real world situation, people make an optimal decision which, in turn, provide highest satisfaction and benefits. In economics, theories have been used to explain the concept of behavioral economics. One of these theories is the rational choice theory which states that humans are faced with options under the condition of scarcity and hence would choose a condition that maximizes their satisfaction. This theory assumes that human beings can make rational decisions given their constraints and preferences by weighing the costs and benefits of each option available to them. Besides, the final decision made is based on the best choice of the consumer (Hatfield et al.,
2016).
A rational person is self-controlled and therefore is unmoved by external factors and emotions and therefore, he or she knows what is best for himself. Behavioral economics uses psychology to explain why people sometimes make irrational decisions and also how and why their behavior does not follow economic model prediction. Currently, companies are incorporating behavioral economics since they understand that consumers are irrational. Nevertheless, the concept of behavioral economics adopted by companies also helps to boost sale.
Conclusion
It is crucial for companies and other business entities to note that the performance of the institutions is greatly influenced by their decisions regarding the prices of their commodities. Apparently, the price changes can determine how the consumers react concerning the products of the companies. Therefore, companies should understand that their consumers are irrational thus, the effective way of incorporating behavioral economics in the company is through the formulation of policies which concerns its external and internal stakeholders.
References
Allen, G., Feils, D., " Disbrow, H. (2014). The rise and fall of Netflix: what happened and where will it go from here?. Journal of the International Academy for Case Studies, 20(1), 135.
Hatfield, J. W., Plott, C. R., " Tanaka, T. (2016). Price controls, non-price quality competition, and the nonexistence of competitive equilibrium. Games and Economic Behavior, 99, 134-163.
Li, W., Hardesty, D. M., " Craig, A. W. (2018). The impact of dynamic bundling on price fairness perceptions. Journal of Retailing and Consumer Services, 40, 204-212.
