February 8, 2020
Want to stream a movie? You’ve got lots of choices—Netflix, Apple TV, Disney+, Amazon Prime, and Hulu to name a few. And these streaming services constantly offer you new programming. CNN Business describes the growth of content in the streaming market. Why is this growth occurring? Why aren’t firms content to keep their catalogue size constant?
In what type of market does Netflix compete?
Each of the firms in the streaming market offers content that is slightly different from its competitors. And new firms are entering the market. Netflix’s market share has dropped from 91% in 2007 to 19% in 2019. This market share will fall further as NBCUniversal’s Peacock and WarnerMedia’s HBO Max launch their streaming services in 2020. Large marketing budgets tell us how the services differ in quality and price.
Product differentiation, many firms jumping low barriers to entry, competition on marketing, price, and quality—these characteristics tell us that the streaming market is monopolistic competition.
What is Netflix’s goal and how does it achieve this goal?
The goal of Netflix (and every other firm) is to maximize economic profit. Netflix does this by providing the quantity of subscriptions at which marginal revenue equals marginal cost and charging the maximum price that its customers are willing to pay. The marginal cost of producing another subscription is close to zero.
What happens when new firms enter the market to compete with Netflix?
Maybe your budget allows you to subscribe to three streaming services. When a new streaming service comes online, there are many new shows you’ll be able to watch. You’ll probably decide to give up one of the streaming services you already subscribe to so you can add a new one. Other people are going to make the same decision as you. So, when new firms start to compete with Netflix, the demand for Netflix subscriptions decreases. And with the decrease in demand, the price of a subscription falls, and the quantity of subscriptions decreases. Netflix’s economic profit decreases. It may even become a loss.
Why does Netflix offer new content?
Netflix hopes that by offering new content, the demand for its subscriptions will increase. With an increase in demand, the quantity of subscriptions increases. If demand rises by a large enough amount, economic profit increases.
Let’s look at the graphs.
Now take this short quiz to check that you understand what you have just read.
Multiple Choice Quiz—The Video Steaming Market