Possible inconsistency in Elasticity Analysis – OnlineGo Case

Question

In the OnlineGo case (an ISP entering North America), the following is presented:

OnlineGo plans to acquire 10 million subscribers by charging $20/month.
A new competitor enters charging $10/month.
It is calculated that if OnlineGo lowers its price to $10 while keeping the same 10M subscribers, it would incur losses.
From this, it is concluded that "the elasticity of demand is highly elastic."

My question: If we lower the price by 50% (from $20 to $10) and there is no increase in the number of subscribers (they remain at 10M), doesn’t that suggest that demand is inelastic in that range? Because elastic demand would imply that the quantity demanded increases significantly when the price drops.

Am I misinterpreting an assumption? Or does the case assume that at $20 they wouldn’t reach 10M, but doesn’t make this explicit?

I appreciate your insights.

Answer 1

hey there :)

I would say you are not misinterpreting the concept, you are spotting an implicit assumption in the case. The key is that the case does not assume subscribers would stay at 10M after the price cut, it only shows that even if they did, profits would collapse, which implies OnlineGo relies on a large volume response to price changes. The conclusion of high elasticity comes from the competitive context, meaning customers are very price sensitive and would switch quickly, not from the static 10M comparison itself. Happy to chat more if helpful.

best,
Alessa :)