Figure 14-1 A few years ago Netflix (N)pioneered an online DVD rental service.Blockbuster (B),a brick and mortar DVD/video rental company,waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service.At this point,Netflix had to decide whether or not to lower its subscription price in order to deter Blockbuster's entry into the market.Figure 14-1 shows the decision tree for the Netflix-Blockbuster entry game.
-Refer to Figure 14-1.Does it make sense for Netflix to lower its price in order to deter Blockbuster's entry into the online DVD rental market?

Question

Figure 14-1  A few years ago Netflix (N)pioneered an online DVD rental service.Blockbuster (B),a brick and mortar DVD/video rental company,waited until Netflix had been in business for over a year before deciding whether to establish its own online rental service.At this point,Netflix had to decide whether or not to lower its subscription price in order to deter Blockbuster's entry into the market.Figure 14-1 shows the decision tree for the Netflix-Blockbuster entry game.
-Refer to Figure 14-1.Does it make sense for Netflix to lower its price in order to deter Blockbuster's entry into the online DVD rental market?

Quizplus · Accepted Answer

According to the decision tree, if Netflix keeps its subscription price unchanged and Blockbuster enters the market, Netflix will still make a profit of $5 million. If Netflix lowers its price and Blockbuster stays out of the market, Netflix will make a profit of $7 million. However, if Netflix lowers its price and Blockbuster enters the market, Netflix's profit will only be $1 million, which is lower than the profit it would make by keeping its subscription price unchanged. Therefore, the best choice for Netflix is to keep its subscription price unchanged, regardless of whether Blockbuster enters the market or not.

Figure 14-1 a Few Years Ago Netflix (N)pioneered an Online