The Magic Kingdom in Walt Disney World in Florida. Photo by the AP via the Wall Street Journal.
Elasticity is near the top of the list of topics that students struggle with in the principles course. Some students struggle with the arithmetic of calculating elasticities, while others have difficulty understanding the basic concept. The importance and difficulty of elasticity led us to devote an entire chapter to it: Chapter 6 in both Microeconomics and Economics. (We include a briefer discussion in Chapter 7, Sections 7.5 and 7.6 in Essentials of Economics.)
When the Walt Disney Company released its 2023 second quarter earnings report on May 10, it turned out that Disney CEO Bob Iger is also a little shaky on the concept of price elasticity. During Iger’s previous time as Disney CEO he had started the Disney+ subscription streaming service. Like some other streaming services during the past year, Disney+ has struggled to earn a profit. Disney’s announcement in November 2022 that Disney+ had lost $1.47 billion during the previous quarter contributed to Bob Chapek, Iger’s predecessor as CEO, being fired by Disney’s board of directors.
For this quarter, Iger was able to announce that losses at Disney+ had been reduced to $659 million, although skepticism among investors about whether the service would turn a profit by next year as Iger indicated contributed to a sharp decline in Disney’s stock price. The smaller loss at Disney+ was largely the result of Disney having raised the price of the service in December 2022 from $7.99 per month to $10.99 per month. According to an article in the Wall Street Journal, Iger noted that the price increase had caused only a very small decline in subscribers. Iger was quoted as concluding: “That leads us to believe that we, in fact, have pricing elasticity” with respect to Disney+.
Taken literally, Iger has the concept of elasticity backwards. If “having pricing elasticity” means having price elastic demand, then Disney would have experienced a large loss of Disney+ subscribers after the price increase, not a small loss. To use the concept correctly, Iger should have said something like “we have price inelastic demand.” If we give Iger the benefit of the doubt and assume that he knows the definitions of price elastic and price inelastic, then we can interpret what he said as meaning “we have favorable price elasticity.” Favorable in this case would mean demand is price inelastic.
In any case, this episode is a good example of why many students–and CEOs!–can struggle with the concept of price elasticity.