Pricing Strategies for Firms with Market Power

The most popular movie streaming service is Netflix. Netflix members pay a monthly fee and are then entitled to stream as many hours of programming as they wish. You've been hired by Netflix to determine the profit-maximizing monthly fee. You estimate that each customer's inverse demand for streaming is given by:

P = 0.56 - 0.0112Q

where Q = hours of streaming time.

(a)What is the most you should charge for a monthly Netflix membership? (You may assume Netflix can provide an hour of streaming at essentially zero marginal cost.)(4 marks)

(b)Suppose you learn that there are actually two types of Netflix user: intensive users and casual users. Intensive users comprise 20% of all viewers and have inverse demand:

where Q is measured in hours of streaming time. Casual users comprise 80% of all viewers and have inverse demand:

You are tasked with choosing the optimal monthly membership fee. Netflix remains committed to allowing unlimited streaming once this fee has been paid. (Again, you may assume Netflix can provide an hour of streaming at essentially zero marginal cost.)

i.What fee will you charge? Explain. (Hint:Think of your choices if there were 100 users)

(6 marks)

ii.Would your answer change if intensive users comprised 25% of all viewers?Explain. (same hint!) (5 marks)