the unusual economics of the film industry

Per Alex's kind introduction yesterday, I'm his brother Nicholas and I'm guest blogging for the week.

I'm not an economist but if I have learned anything from my brother (and i have learned lots) it's that economics affects us all.   And i don't mean that in the obvious way that the economy affects us all.  I mean that the academic and esoteric economic theories that are studied in graduate university courses have a very real world and every day practical application.

One interesting thing that I've always found about the film business from an economic point of view is that unlike in any other business I can think of, the cost of manufacturing the product has no affect on the purchase cost to the consumer.  For example Honda can make a cheaper car with less features and cheaper finishes than BMW without losing all of their customers to the superior car because they sell their product for less.  You spend less to make something, you charge less for it.  Makes complete and obvious sense.  Not so in the film business.  I am an independent film producer and I make films that typically cost somewhere between $5M and $10M.  But when I make, say, an $8M film it has to compete at the same price level as the studios' $80M or $100M film.  It costs the consumer the same $12 at the multiplex (and whatever it costs to rent a DVD from Blockbuster these days) for either film.   There is no price advantage to the consumer for choosing to see a less expensive film.  This naturally makes it terribly difficult for smaller films to find an audience.  I find this quite fascinating and I can't readily think of another industry like it. 

A few years ago Edgar Bronfman Jr, during the time his family briefly owned the Universal film studio, suggested that theaters actually charge different admission prices for different pictures so those films that cost less to make had correspondingly lower ticket prices than the mega-budget studio pictures.   He was roundly ridiculed by the industry.  But truth be told I actually think the less-the-warm reception his proposal received had more to do with the fact he was an 'outsider' who had bought his way into Hollywood than on the actual merit of the idea itself.  Sound like good economic practice to me.


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