Netflix: A Lesson In the Law of Demand

For those of you who heard, there was recently a price increase in Netflix's services. It began offering its streaming and DVD services separately. Those who continued to use both services saw an effective price increase of 60%.

Lo and behold, Netflix came out today and announced that its profits would be only 72 cents to $1.07 a share, compared to analysts' projections of $1.11 a share. Sales are also projected to be only $828.5 million instead of the analysts' expectation of  $842.9 million.

So what went wrong? For one thing, Netflix forgot to take into effect one of the most fundamental pillars of economics: the law of demand. It evidently forgot that as prices increase, quantity demanded decreases. Considering the fact that a goods like online streaming and DVD rental, both markets with numerous competitors, can be expected to be relatively elastic in demand, it is somewhat surprising that Netflix's management managed to overlook this critical fact. The result? A vote of no confidence in Netflix's management.