You have learned that a firm incurs two types of costs of production: fixed costs and variable costs.
Can you name an industry where the fixed costs are relatively high compared to the variable costs?
Can you name another where the variable costs are relatively high compared to the fixed costs?
Post your picks, along with your explanation and possible references.
Next
Last week, you learned the concept of “elasticity”. This week, you will evaluate and discuss its relevance as you compare and contrast two real-world decisions by two different companies.
Case 1: In July 2011, Netflix implemented a plan to split up its DVD instant streaming plan into 3 separate plans: (1) DVD only, (2) streaming only, and (3) DVD streaming. The price for the DVD streaming plan would be raised from $10 to $16. The rate hike caused a loss of subscriber base to the tune of 1 million [reported in the following article in the Huffington Post” http://www.huffingtonpost.com/2011/09/15/netflix-price-increase-subscriber-loss_n_964026.html ] and a huge drop in the share price of Netflix. The company defended its decision and implemented the change nonetheless.
Case 2: Around September 2011, Bank of America announced that, beginning in early 2012, it would start charging its customers $5 a month for using their debit cards [the following is an article from the Christian Science monitor: http://www.csmonitor.com/Business/2011/0930/Debit-card-fees-Why-Bank-of-America-will-charge-5-for-debit-card-use. Following the tremendous backlash from credit card holders, the company abandoned its plans and did not implement its new fee.
Required:
Compare and contrast the two cases. What elasticityconsiderations would Netflix and BankAm have considered in their individual decisions? Why did they react differently to essentially similar customer responses?