Netflix increased its prices. And whaddya know.... subscriptions declined. We teach it all the time: an increase in the price leads to a reduction in the quantity demanded.
The customer backlash against the higher rates, kicking in this month, has been much harsher than Netflix Inc. anticipated. That prompted management to predict Thursday that the company _the largest U.S. video subscription service_ will end September with 600,000 fewer U.S. customers than it had in June.
So what really happened was that Netflix executives know that demand curves are downward-sloping --- they expected some drop-off in subscriptions. But they underestimated the price elasticity of demand (econ-speak for how responsive the quantity demanded would be to a given increase in the price).
One reason for the drop-off in quantity demanded is that people will rent or watch fewer movies. But another reason, one which will affect Netflix even more in the longer run, is that their higher prices open the doors for even more competition than already exists. From the same article,
This could be an opportune time for would-be rivals to attack Netflix's streaming service too, BTIG Research analyst Richard Greenfield wrote in a Thursday blog post. Internet retailer Amazon.com Inc. launched a free streaming service for subscribers to its two-day shipping service earlier this year. Greenfield and other analysts believe Google Inc., already the owner of YouTube, is eager to expand its Internet video offerings to include more movies. One way Google could achieve that would be to buy Hulu.com, which has been put up by for sale by the television network owners that supply its video content.This provides another good example in which the price elasticity of demand (responsiveness to price changes) will be greater in the long run than in the short run.