Redbox recently announced that it would raise its nightly DVD rental fee from $1 to $1.20 due to increased costs, specifically the increase in charges for processing debit card transactions. In an article by Matt Brownell (http://www.thestreet.com/story/11293833/1/redbox-price-hike-could-dodge-netflix-outrage.html), Redbox's interchange fees are going to increase from $.06 to $.23 on average. In the days following the announcement, Coinstar, owner of Redbox, saw their share price drop by %10. This may have been worse, but Redox eased the new, higher price into the market by first testing it in different markets. However, despite the drop in the share price, the price increase on DVD rentals will pay off in the end. Some articles cite that after Netflix raised their prices 810,000 customers cancelled their subscriptions looking for a cheaper alternative (http://seekingalpha.com/article/302037-netflix-disaster-shifts-focus-to-redbox). Redbox in a prime position to win over those 800,000+ customers with their cheaper prices. The pricing decision must also have economic reasons backing it. In chapter 9 of the text teaches that "To maximize profits...management should take into account both the demand and the costs" (pg. 229). Specifically mentioned in making a pricing decision that will maximize profits are the marginal costs, the price elasticity of demand, and the incremental margin percentage. The authors explain that "...when marginal revenue equals marginal cost, then the incremental margin percentage equals the reciprocal of the absolute value of the price elasticity of demand" (pg. 228). Using the numbers from Matt Brownell's article, we know that Redbox's marginal costs are $.23 , with a price of $1.20 the incremental margin percentage will decrease to from .94 to .808. With an incremental margin percentage of .94, that would mean that the price elasticity of demand would have to be -1.237 so a 1% increase in price will lead to decline in demand of 1.237%.
It will be interesting given the recent price increase of Netflix and the number of cancelled subscriptions to see if the price increase will actually lower the demand for Redbox rentals.