Arnold Kling  

Movie Economics

Finance, Risk and Growth... Caplan Now a Co-...

Tyler Cowen posts on one of my favorite topics, movie economics.

a multiplex will charge the same ($9.50 in my case) for the number one movie and for a flop. Nor is the price more expensive for Saturday night, or during the summer when demand is higher. Can any economic model predict these results?

Of his explanations, my money is on this one:

5. Maybe the whole theatrical thing is a shadowplay for popcorn sales and advertising for a subsequent DVD release. The theater owner, on his side, may not care so much about getting the profit-maximizing price right. So he invests in consumer good will by offering a flat price across all films.

My understanding of the way the industry works now is that the studio, not the theater, is entitled to the gross for the first two weeks. And these days, most movies don't last more than two weeks. So, from the theater's point of view, it's all about the popcorn.

I think that the question is whether to be a discount theater--competing on price for all movies--as opposed to trying to charge lower prices for bad movies.

I think that for most people, opportunity cost is as significant as the ticket price when they see a movie. So, getting a $3 discount on a bad movie probably would not cause people to go to that movie.

For Discussion. For what other goods are you surprised to see flat pricing?

Comments and Sharing

CATEGORIES: Business Economics

COMMENTS (5 to date)
Bob Knaus writes:

Postage. It costs the same, no matter how far the letter goes, and no matter whether it is delivered to the city or the countryside.

It didn't used to be that way, of course. Rural Free Delivery is commonly held to be a great boon and equalizer to folks living in the countryside. People often cite it as an example of a beneficial government subsidy.

Surprisingly, there is no cross-subsidy between rural and urban routes. Both operate at a profit, and both have about the same ratio of profitable:unprofitable routes. Primary reason? The rural mail carrier in his old station wagon is considerably more efficient than the urban carrier who has to park his vehicle and deliver to each door on foot. This offsets the density advantage of urban routes.

Here's a paper on the subject. See the appendix, pages 18 & 19, for details on the rural/urban cross-subsidy. The broad conclusion of the paper is that competion would bring far more savings to the USPS than any changes to the current delivery structure.

Brad Hutchings writes:

Digital music. The popular online stores seem to have some kind of flat pricing. 99 cent songs, $9.99 albums on iTMS. etc. I think the gimmick here is simplicity. Yeah, it leads to Freudian fodder for the copyfighters like 59 seconds of DRM'd silence and it probably leaves a few pennies on the table, but the simple pricing model makes it easy to do business, probably far outweighing the problems.

Same with movies. If it's $11 to get in, ok, that's insane, but predicatble. Don't forget that theatres also have various ways of discounting for the price sensitive. My Ralph's Club card has gotten me many a free or discounted ticket.

Chaitanya Sai writes:

I have seen differential pricing in india. Cineplexes in mumbai/bombay charge more for big-name movies and less for the certified flops. I wonder if this is because of the ridiculous number of movies that come out every year (around 400). Does anybody know of other countries that have non-uniform pricing?

Brian Moore writes:

I would think part of the influence on theatre pricing would be the way people react to seeing movies they dislike. When I see a movie I don't like, I don't think "Well, that movie was only worth 3$," but rather I think "I wouldn't have paid any money to see that. In fact, I might have paid to be able to NOT see it." Seeing a bad movie has a negative cost for me.

To use the quality of the movie as a price determiner doesn't seem to work, since the marginal benefit you receive for the ticket isn't the movie, it's the timing of seeing the movie. You're paying for an advance screening. You COULD wait until it's out for 3$ rental, or for free on TV, but you're paying to see it early.

And for this, there is differential pricing. The big theatres in town get the movies first (or 'limited release' movies') and charge the highest ($7.50 in my area). The cheap theatres get them later, and charge less ($5.00). Blockbuster gets it next ($3.00). Finally, I can get it on TV for the price of 2 hours of cable (almost 0$).

There's also the "time-of-day" discount, in which matinees are cheaper to encourage people to come to traditionally less attending showings.

But at any rate, movies do have price curves, they're just based on timing rather than some other quality.

Constant writes:

Just a little question. I often read conjectures about why people do this or that, for example why theater owners charge the prices they do, but I don't often read that the person asking the question actually went and asked theater owners why they do what they do. Am I just seeing an atypical sample, or is investigative legwork typically avoided?

Which is not to say that the theater owner necessarily knows why he does what he does - he is subject to market forces which he does not fully comprehend. Still, the answer could be illuminating.

Comments for this entry have been closed
Return to top