Figure 14-5

Netflix (N)was one of the first companies to offer streaming video services and is still considered a leader in the industry. Spotify (S)offers a music streaming service and in 2015 considered entering the video streaming business. At that point, Netflix had to decide whether or not to lower its subscription price in order to deter Spotify's entry into the market. Figure 14-5 shows a hypothetical decision tree for the Netflix-Spotify entry game.
-Refer to Figure 14-5.Does it make sense for Netflix to lower its price in order to deter Spotify's entry into the streaming video market?

Question

Figure 14-5
  
Netflix (N)was one of the first companies to offer streaming video services and is still considered a leader in the industry. Spotify (S)offers a music streaming service and in 2015 considered entering the video streaming business. At that point, Netflix had to decide whether or not to lower its subscription price in order to deter Spotify's entry into the market. Figure 14-5 shows a hypothetical decision tree for the Netflix-Spotify entry game.
-Refer to Figure 14-5.Does it make sense for Netflix to lower its price in order to deter Spotify's entry into the streaming video market?

Quizplus · Accepted Answer

According to the decision tree, if Netflix keeps its subscription price unchanged and Spotify enters the market, Netflix will make a profit of $18 million. If Netflix lowers its subscription price and Spotify decides not to enter the market, Netflix will make a profit of $14 million. However, if Netflix lowers its subscription price and Spotify still enters the market, Netflix will make a profit of only $10 million. Therefore, it makes more sense for Netflix to keep its subscription price unchanged, regardless of Spotify's entry into the market.

Figure 14-5 Netflix (N)was One of the First Companies to Offer Streaming