Netflix wants to discriminate in price

The article from the WSJ reports that Netflix is planning to increase price for new users and only new users. Is the difference in price consistent with 3rd-degree price discrimination?

The article is also a good introduction to vertical relations, antitrust, and net neutrality.

SUMMARY: Netflix said it plans to increase its U.S. prices for new members by a dollar or two. The company also came out in opposition to Comcast's proposed acquisition of Time Warner Cable. With regard to relationship between Netflix and cable providers, the company has a lot of choices about how it sends content to customers, but at some point, its content must realistically pass through the systems of cable providers. Netflix chief executive told analysts that Netflix had "no choice" when it recently agreed to start paying Comcast to interconnect Netflix servers directly to Comcast's cable systems as a way of ensuring good quality video streaming. Netflix has argued operators should strike such interconnection deals without levying fees. Netflix also came out in opposition to Comcast Corp.'s proposed $45 billion acquisition of Time Warner Cable warning that the combined company would have "anticompetitive leverage" because its systems would pass 60% of homes that take broadband Internet-access.

CLASSROOM APPLICATION: Students can analyze whether Netflix should increase its prices. Some analysts have argued that Netflix can charge more for its service because the company has the opportunity to close a gap in how much its customers spend for content compared with traditional competitors. Instructors can also present the issue of whether Comcast can use its market power in cable service provision to increase prices on content providers like Netflix. One interesting issue is about the effect of a Comcast-Timer Warner Cable merger on the market power of the merged company when dealing with content providers.

QUESTIONS: 
1. (Advanced) Why is Netflix increasing the price it charges new customers? Why only new customers?

2. (Advanced) Why would Netflix be harmed by a Comcast-Time Warner Cable merger? Keep in mind that Comcast and Time Warner do not compete for customers in any geographic areas.

3. (Introductory) Why do most Netflix subscribers connect to the service using cable connections and not cellular wireless connections?

Is Google good?

This article reports criticism of Google from a media tycoon in Europe. He worries that Google has too much power in the market, that he "had little choice but to engage with Google as 'we know no search engine alternative to increase our online reach'".

Questions to consider?

1. Is Google a monopoly? If so, how did it acquire its position?
2. Does Google have monopoly power? If so, how did it acquire the power?
3. Should the US charge Google with antitrust violations? If so, what remedies should the government seek?

As Wage Debate Rages, Some Have Made the Shift

This article in the WSJ reports the effects of local minimum wage laws that set the minimum above the national rate. The effects vary, some good - higher moral and better customer service - and some bad - closing stores, fewer hours, higher prices, from location and business type.

SUMMARY: In cities where local wages exceed the national minimum, the consequences are big and small, cutting across everything from the number of hours assigned to employees, to menu prices to food ingredients. The article cites a paper in Review of Economics and Statistics: "The reaction among San Jose employers [to an increase in the city's minimum wage] was largely in line with a study of 288 areas where the minimum wage differed across county borders. The research, published in the Review of Economics and Statistics in 2010, found municipalities with higher pay didn't suffer job losses among low-wage restaurant workers. Nearly half of all minimum wage-earners work in food service."

CLASSROOM APPLICATION: Students can examine the effect of an increased minimum wage on firm decisions. "The real-world impacts [of an increased minimum wage] can vary: Some companies had no difficulties passing along labor-cost increases while other businesses said they might close marginal stores to pare losses.... For businesses in San Jose, the results aren't entirely negative. Low-wage employers in the city have raised prices and trimmed costs, but some also report improved employee morale and better customer service."

QUESTIONS: 
1. (Introductory) What is the effect of an increase in the minimum wage on the supply of fast food? What is the effect of the change in supply on the price of fast food?

2. (Advanced) Suppose an increase in the minimum wage results in a $0.25 increase in the marginal cost of making a hamburger. How does the increase in the equilibrium price of hamburgers due to the increase in the minimum wage depend on the price elasticities of supply and demand?

3. (Advanced) Why are some fast food establishments increasing prices in response to increases in the minimum wage while others are cutting back on the number of employees? Why could each of these two responses possibly be profit-maximizing?

4. (Advanced) Is it possible that an increase in the minimum wage does not result in layoffs? Does the article offer good evidence that an increase in the minimum wage does not result the decreased demand for labor?

Americans Lose Their Taste for Cereal, Soda and Soap

This article in the WSJ reports that the use of price discounts has increased and describes possible reasons why. (Conduct a Google search on the title if the article does not load properly.) It is a good introduction to supply and demand. The discussion of price wars might be a good introduction to game theory. Finally, the report that increases in the prices of energy and education are driving down the prices of consumers goods might be a good introduction to monetary policy and inflation, particularly the view that higher oil prices result in inflation only if the Fed monetizes them.

SUMMARY: Makers of consumer staples are resorting to aggressive discounts to overcome an unexpectedly persistent problem: Their industry is barely growing. The article offers a reason for the lack of growth. "Many segments are affected by changing preferences, habits and spending priorities.... The problem for makers of household basics is that consumers are devoting a shrinking share of their wallets to packaged goods as other costs of living rise more sharply, such as health care and education." The article also suggests that product discounting is the result of the stagnant or decreasing demand. "Discounts are in the standard tool kit for consumer-products makers. Still, the current level of activity is particularly high. All told, some 33.7% of consumer packaged goods-from soda and razors to shampoo, shaving cream and paper towels-were sold on promotion in the 12 months through February 2014, according to data from Nielsen." Commenting on the possibility of price wars, "They are the easiest things to start, and the hardest to finish."

CLASSROOM APPLICATION: Students can evaluate the cause of the decreases in demands for consumer products, which presumably is a change in preferences, and the result of the shifts in demands. The short-term consequence is lower prices. Instructors can also ask students to conjecture about long-term price changes.

QUESTIONS: 
1. (Introductory) What factors have caused the decreases in the demands for consumer staples? Discuss preferences, technological change, and the prices of related products.

2. (Advanced) Why are manufacturers and retailers wary of offering frequent discounts on products? What factors in the markets for consumer staples are causing frequent discounting?

3. (Advanced) What is a "price war"? Why are price wars easy to start and hard to finish? What factors in the markets for consumer staples could prompt price wars?

Transparency pricing in healthcare

This article in the WSJ reports on the advantages of increasing the transparency of prices. Conduct a Google search of the title if the full article does not appear.

SUMMARY: There's a major effort under way to make sure patients know how much they'll pay-before they make treatment decisions. "Princeton economist Uwe Reinhardt likens using the U.S. health-care system to shopping in a department store blindfolded and months later being handed a statement that says, 'Pay this amount.' The price-transparency movement aims to lift that veil of secrecy and empower patients and other payers to be smarter health-care consumers.... Experts expect consumers to be much more price-sensitive as they shoulder a growing proportion of health costs themselves."

CLASSROOM APPLICATION: Instructors can present two points about the incentives of patients to consider price when choosing health-care providers: price transparency; and consumers paying at least some of the cost of care.

QUESTIONS:

1. (Introductory) Why is better consumer information about health-care prices important in bringing down the cost of health care?

2. (Introductory) Why is more patient responsibility in paying for the price of a procedure important in bringing down the cost of health care?

3. (Advanced) How would better consumer information about the prices of various health care providers for a particular procedure combined with greater consumer responsibility for the price of the procedure affect the cost health care?

4. (Advanced) How would "reference pricing" affect the quality of care? How would it affect the compensation of health-care providers?