Tag: Disney+

The Price Elasticity of Demand for Disney+

Supports: Microeconomics, Chapter 6, Section 6.3, Economics, Chapter 6, Section 6.3, and Essentials of Economics, Chapter 7, Section 7.7

The Walt Disney Studios in Burbank, California (Photo from reuters.com)

On August 9, Disney released its earnings for the third quarter of its fiscal year. In a conference call with investors, Disney CEO Bob Iger announced that the price for a subscription to the Disney+ streaming service would increase from $10.99 per month to $13.99. An article in the Wall Street Journal quoted Iger as saying that the company had been more uncertain about pricing Disney+ than rival Netflix was about pricing its streaming service “because we’re new at all this.” According to the article, Iger had also said that “there was room to raise prices further [for Disney+] without reducing demand.” A column in the New York Times made the following observation: “The strategy now is to extract more money from subscribers via hefty price increases for Disney+, and hoping that those efforts don’t drive them away.”

a.  What is Disney assuming about the price elasticity of demand for Disney+? Briefly explain.

b. Assuming that Disney is only concerned with the total revenue it earns from Disney+, what is the largest percentage of subscribers Disney can afford to “drive away” as a result of its price increase?

c.  Why would Iger point out that Disney was new at selling streaming services when discussing the large price increase they were implementing?

d.  According to the Wall Street Journal’s account of Iger’s remarks, did he use the phrase “reducing demand” as an economist would? Briefly explain. 

Solving the Problem

Step 1:  Review the chapter material. This problem is about the effect of a price change on a firm’s revenue, so you may want to review the section “The Relationship between Price Elasticity of Demand and Total Revenue.”

Step 2:  Answer part (a) by explaining what Disney is assuming about the price elasticity of demand for Disney+.Disney must be assuming that the demand for Disney+ is price inelastic because they expect that the price increase will increase the revenue they earn from the service. If the demand were price elastic, they would earn less revenue following the price increase. 

Step 3:  Answer part (b) by calculating the largest percentage of subscribers that Disney can drive away with the price increase. Disney is increasing the price of Disney+ by $3 per month, from $10.99 to $13.99. That is a ($3/$10.99) × 100 = 27.3 percent increase. (Note that we would get a somewhat different result if we used the midpoint formula described in Section 6.1.)  For the price increase to increase Disney’s revenue from Disney+, the percentage decrease in the quantity demanded must be less than the percentage increase in the price. Therefore, the price increase can’t drive away more than 27.3 percent of Disney+ subscribers. 

Step 4:  Answer part (c) by explaining why Iger mentioned that Disney was new to streaming when discussing the Disney+ price increase. Firms sometimes attempt to statistically estimate their demand curves to determine the price elasticity. But particularly when a firm has only recently started selling a product, it often searches for the profit maximizing price through a process of trial and error. Iger contrasted Disney’s relative lack of experience in selling streaming services with Netflix’s much longer experience. In that context, it’s plausible that Disney had been substantially overestimating the price elasticity of demand for Disney+ (that is, Disney had thought that in absolute value, the price elasticity was larger than it actually was). So, the profit maximizing price might be significantly higher than the company had initially thought.

Step 5:  Answer part (d) by explaining whether Iger used the phrase “reducing demand” as an economist would. Following a price increase, Disney will experience a reduction in the quantity demanded of Disney+ subscriptions—a movement along the demand curve for subscriptions. For Disney to experience reduced demand for Disney+ subscriptions—a shift of the demand curve—a change in some variable other than price would have to cause consumers to reduce their willingness to buy subscriptions at every price.

Sources:  Robbie Whelan, “Disney to Significantly Raise Prices of Disney+, Hulu Streaming Services,” Wall Street Journal, August 9, 2023; and Andrew Ross Sorkin, Ravi Mattu, Sarah Kessler, Michael J. de la Merced, and Ephrat Livni, “Bob Iger Tweaks Disney’s Strategy on Streaming,” New York Times, August 10, 2023.

Think the Concept of Price Elasticity is Hard? Just Ask Bob Iger.

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.