A brief update on Netflix

Posted by Tatyana Deryugina on Oct 26, 2011

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As you may have heard, Netflix nixed its plan to split its services into two – a mail DVD delivery service and an online streaming service, each with its own website. It now appears that, even though the plan was never realized, this was a very costly experiment. Netflix stock is down, 800,000 subscribers left, and the split wasn’t even implemented. Of course, this may have been the result of the earlier price hike. But judging by the outrage at the split plan, I don’t think that’s the whole story.

Economists often wonder why companies don’t experiment more. It’s well-known that prices are “sticky” and many economists think that firms should to change them more often to figure out the profit-maximizing price. I think the Netflix example suggests one explanation for why companies are reluctant to experiment – consumers appear to really not like it.