Why is there uniform pricing for movie tickets?

by on January 4, 2012 at 1:09 pm in Economics, Film | Permalink

So how come we’re still stuck with $12 tickets for both blockbusters and indie flicks? A few theories:

1) Theaters do price discriminate already, kind of, but they do it with space. At the multiplex, not all theaters are alike. Bigger movies get more theaters with better technology. Smaller movies get older theaters with smaller screens.

2) You can’t consistently cut prices after a successful opening weekend. If people knew that ticket prices would fall after a big opening, many more would wait until the second or third weekend to see it, which would, ironically, destroy the meaning of opening weekends.

3) Price can repel as easily as it attracts, because it’s a signal of quality. If your a theater showing one movie for $6, one movie for $10, and another for $12, perhaps fewer people will see the $6 movie because they assume it’s garbage.

4) Cheaper tickets lead to higher policing costs. I’m a cheapskate, so I might buy a ticket to see cheap, cheap Iron Lady and sneak into Sherlock Holmes. This would create a fascinating incentive for art-house studios to release smaller, cheaper films the same weekend as blockbusters, knowing that thousands of canny consumers might buy fake tickets to their show to sneak into the more expensive blockbuster.

5) Price discrimination offers more opportunities for other movie theaters to steal each others’ audience. Once again, I’m very cheap, so I don’t mind taking the metro way across town to see Sherlock Holmes for significantly less money if one multiplex starts to mark up its blockbusters.

That is from Derek Thompson.  A related research paper is here (pdf).  I would rephrase the question to be a little more specific.  Especially in the days of robust DVD sales, why did they not offer first weekend modest coupon bonuses — as distinct from price discounts — for the most popular movies?  That would drive up attendance, without damaging the gross (as a lower p would), and boost “advertising” for the DVD and the subsequent foreign openings.  Movie markets have changed a bit since then, but that to me is the biggest puzzle.  I would expect some unpopular but cultish movies to have higher prices, not lower prices, much like Edward Elgar books.

Addendum: Here is my 2005 post on same, and Alex’s brother.

Bill January 4, 2012 at 1:14 pm

The premise is incorrect.

Theatres do price discriminate, at least near us.

Matinee prices, Groupons, packages including popcorn, student cards, bulk purchase cards, event cards, senior rates, gift cards.

If you start with a false premise, where do you normally end up?

CBBB January 4, 2012 at 1:37 pm

You end up at Marginal Revolution

John B. Chilton January 4, 2012 at 1:40 pm

Yes, they price discriminate, but which of these violates uniform prices across different films? His starting premise is not that there’s no price discrimination; it’s that “we’re still stuck with $12 tickets for both blockbusters and indie flicks.”

Steven R January 4, 2012 at 1:45 pm

None of those are based on the movie you are paying to see. Go to a theatre at any given moment, and the price for all shows will be the same for you.

Bill January 4, 2012 at 4:04 pm

Steven,
Think about this using your definition of price discrimination.

If I were to have a Friday sale, and no sale on Thursday, under your definition there would be no price discrimination because in your words, “at any given moment, and the price for all shows will be the same for you.”

neil January 7, 2012 at 9:14 am

The question is not “Why is there no price discrimination of any sort in movie theatres?” I don’t see why you think it is.

Ryan January 4, 2012 at 4:21 pm

Wouldn’t the title, “Why Do All Movie Tickets for Movies Shown at the Same Time and Place without any Coupons for a Single Age Demographic Cost the Same?”, be just a bit too long?

I lost interest just typing that.

Bill January 4, 2012 at 4:35 pm

Bingo.

You get a free ticket at the matinee performance exercisable between 4 and 6pm Mon through Thurs excluding holidays.

Andrew' January 4, 2012 at 4:45 pm

You are selling the seats, not the movies, so you price discriminate/segment admission, but not the movie. The movie earns admission by meeting the desired rate of return or makes way for the next experiment.

Bill January 4, 2012 at 5:08 pm

Andrew, Good point. And, there are some who can’t tell the difference between a good movie and a bad one, but can tell the time.

Cliff January 4, 2012 at 5:25 pm

Does that actually happen?

Willitts January 4, 2012 at 9:58 pm

But you get the same discounts through Grouping or Costco with the most and least popular movies.

The question remains: why is the undiscounted price the same?

CBBB January 4, 2012 at 1:27 pm

Who goes to movie theaters any more? They’re the worst

msgkings January 4, 2012 at 1:34 pm

I guess no one. The millions who are claimed to go every day are obviously fake people.

Tony January 4, 2012 at 2:16 pm

I had the opportunity to see several movies during my time off last week, and as bad as parts of the movie-going experience can be, it’s still really something to see a big movie on a big screen with a big crowd. It’s a wholly different experience than sitting at home fooling around on my iPad while half-watching a movie. Sitting in a dark room with a screen filling your vision, experiencing a movie with a bunch of strangers gasping, laughing, crying, comprehending at the same time… There’s something to that, and it’s a shame theaters, and the movies they show, mostly don’t live up to that experience.

ricardo January 4, 2012 at 4:25 pm

Nobody; they’re too crowded.

ricardo January 4, 2012 at 4:25 pm

whoops, that was in reply to CBBB.

msgkings January 4, 2012 at 4:33 pm

+1 for the Yogi Berra quote applied well

eddie January 5, 2012 at 3:01 pm

The movie theater experience can be replicated (and in fact surpassed) with a decent home theater setup, the cost of which is now within the means of pretty much anyone who owns a house.

… well, except for the crowd of strangers part. But – and obviously YMMV – I’ve never felt any kind of group experience with the rest of the audience at a movie theater. Other than at Rocky Horror, of course, but that’s not so much a movie as it is live theater (and I do appreciate having a crowd at a live show).

neil January 7, 2012 at 9:17 am

I once lived near an indie movie theater that showed a series of Roberto Benigni films; I went to two or three. I still remember that I’ve never laughed so hard or so long; the whole theatre was roaring.

A while later, I rented a couple of the same movies to show to a friend who hadn’t seen them. We sat there stone-faced the whole time.

Conclusion: Watching a movie in a crowd adds value.

Steven R January 4, 2012 at 1:40 pm

I don’t think #3 is much of a factor, or else you would see more uniform pricing for books, dvds, and cds.

A larger factor is the size of the audience. The 50 million people who see a Michael Bay movie need to split the $250 million budget. The 1 million people who see an indie film need to split a $5 million budget.

If the optimal price discrimination works out to be less than 10% of the ticket price, its probably just easier to keep it flat.

Michael Fisk January 4, 2012 at 2:02 pm

You do see pretty uniform prices for CDs, DVDs, and books, except for the aforementioned budget titles, which roughly proves the point.

Alan Gunn January 4, 2012 at 5:23 pm

You don’t see uniform prices to buy DVDs, but the prices to rent them (from Netflix, and if memory serves Blockbuster) are uniform. Interesting.

Willitts January 4, 2012 at 10:14 pm

Rentals are returned to inventory for re-rental. Display costs are near zero. New disks can be reproduced at low cost when there is high demand.

Movies for sale take up valuable retail shelf space until sold. The display and storage costs are compounded.

Physical disks are nearly history. In a few years, all movies will be downloaded on demand. It will be interesting how we manage and price bandwidth.

awfulconcoction January 4, 2012 at 1:40 pm

Shouldn’t the obvious answer be lack of competition? Few first run theaters compete with each other on price, especially is small areas. Instead, theater owners segment their markets into first run, second run, and even third run movies.

Greg Q January 4, 2012 at 3:38 pm

Other than your incorrectly calling it “lack of competition”, you’ve hit on the answer. Different types of movies end up in different theaters. You want to see a cheap indie movie, go to a cheap theater. You’re paying for the quality of the theater, not the quality of the movie.

Actually, theaters would LOVE #2, and the studios would hate it, because the studios get more of the 1st weekend take than they do of the 4th weekend take. So my guess is the studios would object if they tried to do that.

Pete January 4, 2012 at 1:41 pm

This seems to be yet another case of someone who doesn’t even know the literature for the paper he writes. Google Heidhues Koszegi 08, competition and price variation.

Thomas January 4, 2012 at 2:11 pm

The authors of the linked paper are cited in the paper you cite. I’d guess they are familiar with it, but of course weren’t familiar with it when they wrote their papers in advance of it.

charlie January 4, 2012 at 1:58 pm

why is there only one theatre in DC that sells booze?

Allen January 4, 2012 at 2:38 pm

There are at least two that I know of — the West End (small indie house on 23d St.) and the E Street (larger indie house). If I’m not mistaken, there are theaters at Mazza where you can get a drink too.

(Not That) Bill O'Reilly January 4, 2012 at 7:33 pm

In the larger DC area, you can also get booze at the AFI Silver Theater in SIlver Spring, as well as the Arlington Drafthouse and Cinema (though the latter isn’t quite a movie theater in the traditional sense). THere is also a Landmark cinema in Bethesda (part of the same group as E Street), but I don’t recall ever seeing booze sold in there.

Or, y’know, invest in a flask.

Lupis42 January 4, 2012 at 2:00 pm

Bill
But there is no price discrimination between movies once you’re in the theater. Which seems odd, especially if one is selling out and another is barely selling.

Bill January 4, 2012 at 4:41 pm

Menu costs. And, you assume that movies are price elastic. Think about inviting a date to a chick flick and then switching her to a Chuck Norris film because it was cheaper. The cost was getting her there (or even to date you) and the film is just marginal to that effort and the cost a meal when you put it all together.

Might be fun, though, to see if you could bait and switch your date for a cheaper movie after she got there.

Don’t suggest you try it.

John Schilling January 4, 2012 at 2:00 pm

If I’m a theatre owner hypothetically selling out “Iron Lady” at $6/seat and “Sherlock Holmes” at $12/seat, why am I showing “Iron Lady” again? Or, more to the point, why am I selling as many “Iron Lady” tickets as I am, when I could move it into one of my smaller theatres, freeing up seats for the more profitable “Sherlock Holmes”? And, incidentally, reducing the supply of “Iron Lady” tickets, thus increasing price given constant demand.

A large muliplex, and even more so a large chain with multiple theatres in the same area, can almost arbitrarily shift its supply of individual seats-in-a-theatre-showing-X between various movies, to better profit from the immediate demand. It isn’t clear that the revenue-maximizing distribution of movie seats is the one which results in equal prices for all movies, but it’s probably close. And given that the transaction costs (for theatre owner and customer alike), take a positive delta the instant you do any movie-based price discrimination, the profit-maximizing distribution is almost certainly going to be the one that lets you fill all the seats with $12 tickets.

This hypothesis overlaps with point #1 in a way that is difficult to deconvolve, given that smaller theatres are generally the ones lacking in extra amenities. And note that it does work across competing theatre chains, who all look at what the competition is playing, what the competition is charging, and whether e.g. their customers are all fleeing to the competition on the grounds that the competition’s one-price tickets simplify their moviegoing decisions.

Malcom Digest January 4, 2012 at 2:59 pm

This.

I have no problem understanding how a less popular movie showing in a theater with 50 seats brings the same ticket price as a more popular moving showing in a theater with 400 seats. Seems like basic economics (supply/demand.) Additionally movies that aren’t expected to be block busters might open on 400 screens nationwide while big summer blockbusters might open on 1500 screens nationwide.

One could assume that proper management of supply allows you to match exactly the demand at a standardized ticket price.

An additional benefit to this is that multiplexes won’t have to station ushers at each theater entrance (barring sold out showings) for the duration of the show. Without an usher if prices varied between shows then a dishonest patron would buy the lowest priced ticket and go to the highest priced movie. So make all ticket prices the same and you don’t need as many employees standing around checking tickets on entry and reentry.

Dan Abrams January 4, 2012 at 10:44 pm

Indeed, this is the case. Small, indie flicks on four or five screens often do much higher per-screen grosses in a weekend than big blockbusters on 4,000 screens. The indie films sell out, the blockbusters have more screenings and more empty seats.

byomtov January 4, 2012 at 9:28 pm

Thank you.

Not only does your comment provide useful information, it also raises the obvious, but unanswered question:

If economists want to understand movie ticket pricing, why don’t they go and talk to theatre owners and managers instead of speculating about various theoretical explanations.

What I think is that this is one instance of a rather annoying game: find some economic phenomenon and try to provide a theoretical explanation. That’s not science; it’s masturbation. If you want to know why people do certain things, try asking them.

Adam January 4, 2012 at 2:06 pm

How about the simpler explanation? Studios don’t want them to price discriminate and will cut off access to content if they do.

JWatts January 4, 2012 at 3:07 pm

+1

The Studios intentionally reduced the number of low cost theaters in the 1990′s. Of course this certainly helped ensure the boom in RedBox, NetFlix, etc. It’s a deliberate policy, though not a particularly smart one.

JWatts January 4, 2012 at 3:20 pm

Correction:

I thought that eliminating the discount theaters was deliberate, but after doing a little research it appears that it was caused primarily by a theater glut disappearing combined with the reduction in the time between initial release and DVD release.

Steven Kopits January 4, 2012 at 2:10 pm

I find a policy of high ticket prices overall has turned movie tickets into being a planned event, whereas before it was just a spur-of-the-moment activity. Pretty pricey to go to the movies nowadays, particularly if you have a family.

msgkings January 4, 2012 at 3:21 pm

If you have a family, nothing is spur of the moment anymore. Movies are one of the many things that become big planned events. Believe me, I know.

TheophileEscargot January 4, 2012 at 2:15 pm

I don’t know about the US, but here in the UK they change the price based on time. If you want to go off peak, there’s always some kind of cheaper ticket or discounted price or unlimited-off-peak-films-per-month deal.

Show time is a more important factor than the popularity of a particular film.

At 2PM on a Tuesday, you can’t even fill a fraction of the seats for the most popular blockbuster. Why put on a less-popular film at an even greater discount?

At 9PM on a Friday, you could easily fill the place, but you want the most popular films so you can charge the highest peak-time price.

noob January 4, 2012 at 2:17 pm

IF differential pricing is implemented:

2) smoothes out the revenue stream a bit over time but besides being “scary”, would anyone’s interests be hurt?

3) would increase take for cheap movies from cheapskates. Derek cites “In Japan, tickets for Jurassic Park were profitably sold for a premium of 67%, while tickets for Austin Powers were profitably sold at 45% discount for young audiences.”

4) admittedly requires higher labor costs. I don’t know the numbers, would those higher costs be all that prohibitive? Surely this would cut down on people sneaking into multiple movies after paying for just one (admittedly few). Inner city multiplexes could use more security guards. Balance that against the additional revenue from differential pricing …

Marie January 4, 2012 at 2:20 pm

Reasons too see a movie in the theater:
1. You absolutely cannot wait for it to come out on dvd. I must gaze at Edward Cullen/Harry Potter RIGHT NOW.
2. Special effects or cinematography that are more enjoyable on a big screen.
2.1. You enjoy 3D movies
3. Nothing else to do that day/night and you feel strongly about leaving the house.

What movie theater you go to*:
1. Your movie is playing at the right time.
2. The seats are nice.
3. The local crowd there isn’t too annoying at that time of day.

* The invention of giant purses means the price/quality/availability of beer at concessions is rendered meaningless and not listed. Too bad you dudes look suspicious carrying your backpack in, but I just look stylish in my purse large enough to smuggle in a toddler.

JWatts January 4, 2012 at 3:11 pm

“The invention of giant purses means the price/quality/availability of beer at concessions is rendered meaningless and not listed. Too bad you dudes look suspicious carrying your backpack in, but I just look stylish in my purse large enough to smuggle in a toddler.”

The phrase “large enough to smuggle in a ‘toddler’ ” for a convenient method for obtaining a mid-movie snack is oddly jarring.

The Anonymouse January 4, 2012 at 3:51 pm

Or awesome, depending on how you feel about people bringing toddlers to movies not meant for toddlers.

Now if I could just snack on the cell phone of the teenager texting next to me.

Marie January 4, 2012 at 5:02 pm

Snacking on toddlers?

Dunno, they’re all sticky most of the time.

JWatts January 4, 2012 at 5:55 pm

Seems like this was problem that was solved by the introduction of M&M’s.

Ross Williams January 4, 2012 at 2:30 pm

Movie theaters have begun price discrimination based on picture shown. Many theaters are building two tiers of auditoriums, regular and high quality. High quality supposedly uses better projectors (IMax Certified or whatever), changes to the seat fabric, and possibly more convenient access to snacks. My area theater recently only showed the new Mission Impossible in these rooms, which cost an extra $5 over the standard experience. Movies that aren’t expected to sell out are more likely to be shown in the regular auditoriums.

Allen January 4, 2012 at 2:41 pm

Not too long ago, there were a number of “second run” theaters where you could see a hit movie for a buck or two after they finished at the major multiplexes. Those have pretty much all gone away — and I suspect this was effected by what is essentially a boycott or other concerted action by the big distributors (blatant antitrust violations aside, it appears that’s what happened). Can anyone fill in the blanks on this?

Thomas January 4, 2012 at 2:46 pm

I thought it was the decrease in time from initial release to home viewing. It’s down to five months or so, which doesn’t leave a lot of time for second runs at the “dollar house”.

Urso January 4, 2012 at 2:50 pm

This is my understanding. I used to go to the dollar show back in high school. There were literally entire rows of seats just missing; other seats would collapse if you tried to sit in them. And it was probably swept out about once or twice a week. Still, only a dollar.

JWatts January 4, 2012 at 3:19 pm

I thought that eliminating the discount theaters was deliberate, but after doing a little research it appears that it was caused by a theater glut disappearing combined with the reduction in the time between initial release and DVD release.

KLO January 4, 2012 at 4:34 pm

Having once frequented second-run theaters, I think a lack of capital investment probably choked them off. Most second-run theaters were older theaters with fewer screens than the newer multiplexes. Because of their age, many were worn but perfectly serviceable during the 1990s or early 2000s. With the ravages of time and a lack of capital investment, many of these theaters have now deteriorated to the point where half the seats or more are broken, the sound is so bad that you could not hear the movie and the screen is warped or water-stained in some meaningful way. Even with very low-cost tickets, it just is not worth the frustration.

Thomas January 4, 2012 at 2:42 pm

Of course we do see some price discrimination, as anyone familiar with the recent 3D trend has seen. The 3D option is usually $3-$5 more per ticket compared to the same film without 3D.

And theaters have long allowed their patrons to use discounted passes for many but not all movies. Want to see the blockbuster opening weekend? You can’t use that pass. (That’s what “No Passes” means in the movie advertisement.) (Think of who is willing to use passes and who isn’t, and what it takes to get them, and where the money goes and when, and you’ll see why theaters love passes.)

A few years ago the question was why we saw so little variation in pricing for tickets for movies, sporting events, etc. We have much more variability now than we did. Many professional sports teams (and some colleges as well) reference demand in setting prices for particular games. I’d expect some theater chain to try a more extensive regime of variable pricing.

As for Tyler’s puzzle about opening weekend discounts, I think we can better understand it by thinking of the difference in perspective between the theater owner and the movie studio. The movie studio is the one who should be pushing to get the crowd in the door with a discount. (They’d probably be better off giving coupons than advertising on network TV.)

Finally, don’t unpopular-but-cultish movies have a higher effective price? Most art theaters are just as expensive, if not more expensive, and are significantly less comfortable. And that’s before considering times and frequency.

Bill January 4, 2012 at 5:38 pm

All good points. For the opening week-end, the studio price discriminates to the theatre by offering different amounts of advertising support and sharing advertising burdens. In fact, advertising goals are often disclosed to the theatre to induce the theatre to take the risk of running the film.

Andrew' January 4, 2012 at 2:43 pm

Obviously, the answer is that the people who make the movies don’t know good movies from bad movies.

Tony January 4, 2012 at 3:09 pm

This is definitely true.

JWatts January 4, 2012 at 3:22 pm

Do you have any evidence for this? (Looks at the current list of Blockbuster movies.) Oh, never mind.

Marc January 4, 2012 at 2:47 pm

Why don’t movie theaters price based on supply and demand? Make going to the movie like a stock market game. The day after Christmas when theaters are full to the rafters, those who are stuck breaking their necks looking straight up can get a break. This is not exactly price discrimination based on what film is being played (idie VS Blockbuster), but it seems like the cheapskates would be more inclined to see a film at a lower cost even if it is next to a crying baby in the front row of a 20 foot screen. Paying those lower costs, the super savers might be inclined to spend the ridiculous $5 for a coke after feeling like they just saved a few. Slow nights might see a boost, and indie films would be priced based on their demand, making it possible for an indie to get the big nice shiney theater if the demand is right….

Don January 4, 2012 at 3:02 pm

The book is super-expensive but if you’re interested in some thoughts, try Arthur de Vany’s Hollywood Economics http://www.amazon.com/Hollywood-Economics-Uncertainty-Routledge-Contemporary/dp/0415312612/ref=sr_1_2?s=books&ie=UTF8&qid=1325707071&sr=1-2. Net-net: it’s impossible for any studio to know in advance whether something will or won’t be a hit, the only thing you can do once you discover it’s a hit is that you add screens as much as possible. In that kind of environment the only rational response is to keep all pricing the same and then rather than dropping prices, drop screens on the unpopular stuff and add screens on the more popular stuff.

Remember also that the exhibitor only makes their money from exhibitions, but as the weeks go on the exhibitor makes more money from each ticket sale. A ticket sold for $10 on the first weekend, $9 will usually go to the studio, but in week 5 it’s more like $5 to the studio and $5 to the exhibitor and so there’s a pretty simple cost-benefit analysis that militates in favor of keeping the prices higher if there’s nothing good to replace it – an older film with a 30%-full theater is almost more lucrative than a new film with an 80%-full theater.

Andrew' January 4, 2012 at 3:36 pm

Similar to my thought. The theater wants a certain return per seat or screen. If the movie doesn’t support it they replace it.

Bill January 4, 2012 at 4:19 pm

Actually, there are also risk sharing contracts between the studio and theatre as well: Sony had a model where they would license the theatre and take back revenue based on attendance and sales at the maximum price. In effect, when you were all done, Sony was renting the theatre.

Rahul January 4, 2012 at 4:25 pm

Could it be that cinema ticketing is highly inelastic? This plot shows that since 1960 Americans have consistently bought 5 movie tickets per capita annually. No matter what the ticket prices were; and the prices have indeed fluctuated by a factor of 100% yearly.

Andrew' January 4, 2012 at 4:34 pm

And since they don’t know anything, they don’t want price interventions to mess up the information discovery.

Bill January 4, 2012 at 4:49 pm

Don, A better book is Harvard Econ Prof Richard Cave’s “Creative Industries: Contracts between Art and Commerce”, although it is getting older, and Varian and Shapiro, Information Rules. You can also look at the syllabus for an economics of the media course, such as the one offered at NYU: http://people.stern.nyu.edu/wgreene/entertainmentandmedia/course.htm to get more current articles.

Don January 4, 2012 at 8:10 pm

Thanks. I picked them up. Was generally familiar with them and will be interested to see why you describe them as better.

Bill January 4, 2012 at 11:07 pm

Caves piece is more of a case study in the tradition of IO industry studies and may be more abstract than the piece you cited but which I haven’t read.

bluto January 4, 2012 at 3:04 pm

I suspect it’s to prevent differing prices from becoming an implicit signal about supplier belief about quality. It seems to be terribly hard to predict which movies are going to succeed, prior to release.

Paul Johnson January 4, 2012 at 3:33 pm

Wouldn’t theaters need a lot of knowledge to fine-tune pricing down to the individual movie level? Who can predict the turn-out for a specific movie on a particular day at a given price? As opposed to, say, items in a supermarket, where the same products are sold day in and day out, and with the supermarket chains having literally billions of data points to work with.

Rahul January 4, 2012 at 3:35 pm

What’s the revenue model for the cinema versus the studio / distributor? Does the cinema pay a fixed price per week and bear the loss if people don’t turn up? Or does the cinema set ticket prices and the distributor gets a fixed percentage of sales? (In the latter case how does the studio ensure the cinema doesn’t fudge sales figures to an artificially low number?)

Rahul January 4, 2012 at 3:39 pm

Another aspect is avoiding cross-cannibalization of your own sales: If there was a $6 movie offered, how many of the potentially $12 viewers would merely switch their movie choice?

KJ January 4, 2012 at 3:59 pm

Theater movies are consumed in a few different ways. Sometimes a moviegoer wants to see a specific movie, and when that movie goes out, the moviegoer buys a ticket and attends. More often, however, the moviegower may say, “I haven’t seen a movie in a while. I’m going to go to one.” Then the moviegoer browses the listings and picks the one he/she most wants to see. If blockbusters were more expensive, they would likely still pull in the viewers in the first category, but they would lose viewers from the latter category. Charging uniform prices actually maximizes profit across the industry. The viewer who decides that they want to go to the movies before they decide what to see, may very well pick a cheaper movie when presented with the option. Both groups of consumers, however, are satisfied when presented with uniform prices and and a variable supply across titles.

Kevin Postlewaite January 4, 2012 at 4:10 pm

Why discriminate on price when you can cheaply adjust supply between the different films to match each film’s demand at the same price for each film? My multiplex has a variety of screens with different numbers of seats: the most popular films are shown on multiple screens with large number of seats, the less popular are shown on individual screens with a smaller number of seats.

Seth January 4, 2012 at 4:12 pm

My guess is that they don’t make more money by doing it. Which means that overall, while we complain about movie prices, it’s not as significant of a factor in going to see a movies as other things — like what’s on the screen, who you are with, what time and day it is and what other options you have for occupying your time.

Let’s say they drop the price from $10 to $7 for some film that isn’t bringing in many people. That seemingly modest $3 price drop is 30% and would need to bring in 42% more (not just cannibalize from other full paying venues) to breakeven.

My guess is that there aren’t people where the $3 price drop would change their behavior to breakeven.

Andrew' January 4, 2012 at 5:55 pm

Not to mention the advertising cost of trying to tell people “hey, come see this non-blockbuster that noone at the watercooler is going to think you are cool for having seen!”

Bill January 4, 2012 at 4:17 pm

OK, let’s look at this a different way for a minute and define terms.

This post is looking at price discrimination too narrowly, fails to define terms, and fails to distinguish between price discrimination WITHIN a channel, price discrimination BETWEEN channels, and price discrimination between end users WITHIN a channel.

1. Price discrimination between channels. Theatres, DVD retail outlets, on air Netflix, etc. are all different channels. Movie owners price discriminate between those channels.
2. Price discrimination within channels. Theatres pay different rental rates based on first and second run; some theatres pay an up front fee and so much per attendee, others pay per person ,etc. Some houses get advertising support, others get less. Producers offer packages, mixing a dog with a good product, and charge a bundled price, which in effect is price discrimination.
3. Price discrimination to end users. Theatres price discriminate to end users in the ways I listed above.

If you look at this as a model of maximum profit extraction, movie studios price discriminate like hell, and train their channel partners to do the same so they can extract as much revenue as possible.

I think I’m going to have some popcorn and Coke.

Brandon Berg January 4, 2012 at 8:04 pm

Especially with a multiplex, the scarce resource is the total number of seats available in the theater, not the number of seats available for any particular movie. More popular movies get shown on more screens, whereas less popular movies get shown on one screen, and may share a single screen with another movie (i.e., alternate movies between showings). Theaters have no incentive to show an unpopular movie at a reduced price when they can just allocate that screen time to a popular movie and sell tickets at full price.

NAME REDACTED January 4, 2012 at 8:09 pm

As a theater owner explained to me, theaters are not in the movie business they are in the concessions business.

NAME REDACTED January 4, 2012 at 8:10 pm

He explained that they didn’t actually make any money from the ticket sales.

NAME REDACTED January 4, 2012 at 8:11 pm

It went straight to the movie companies.

DanC January 4, 2012 at 10:08 pm

Two points

One is that the Indie movie is priced very high (not that the blockbuster is priced low). The indie movie is targeted for heavy consumers of movies and the high price keeps away many low demand or casual consumers. However lowering the price for indie movies will not generate many additional sales beyond diehard movie consumers.

Second, to raise the price of a blockbuster movie you might need to restrict the distribution of the movie, at least initially. But blockbuster movies are launched with huge advertising campaigns that are timed for maximum impact. Indeed the advertising budget, and joint marketing campaigns, are non trivial expenses and are viewed as vital to the success of a movie. The current feeling in Hollywood seems to be that you need to make a spectacular splash in a carefully orchestrated launch. Fill as many seats as you can, the marginal cost is near zero, as quickly as you can, to reduce the risk of bad word of mouth on a movie. BTW I am told that young males will actually pay to see the same blockbuster movie more then once.

Steve Sailer January 5, 2012 at 1:43 am

“If I’m a theatre owner hypothetically selling out “Iron Lady” at $6/seat and “Sherlock Holmes” at $12/seat,”

Why the assumption that an upscale film like the Margaret Thatcher biopic would make more money with a lower ticket price than the mass market family / teen film? In L.A., the Meryl Streep movie is playing at the Arclight on Sunset Blvd. for $16 a seat on weekends and at the Landmark on Pico for $14.50, while the average price of theatres playing Sherlock Holmes in LA is in the $9 to $12 range.

NAME REDACTED January 5, 2012 at 7:55 am

So you are saying that over that range, the demand for any particular movie is extremely inelastic, even if the demand for “going to the movies” is elastic. That is mindblowing. Yet another example of when I say that we cannot aggregate demand easily (and AD is a load of nonsense).

John Schilling January 5, 2012 at 11:39 am

There are two different markets being served by the same physical facility – people who want to go out and see any convenient and generally acceptable movie, and people who want to see a specific movie. The former demand is large, highly elastic, and mostly served by constantly showing “blockbuster” films in a few general categories at the local multiplex. The latter demand is relatively small and inelastic, and while it encompasses everything from blockbusters to indie flicks it is lost in the noise where blockbusters are concerned.

The rational strategy for an individual theatre owner is to allocate seats between the various films (and thus markets) such that the market-clearing price for each film at his theatre is approximately the same and then charge exactly the same price for each. Add competing theatres, and you get approximately similar prices across the market but with some allowance for e.g. matinees being cheaper and upscale theatres in nice neighborhoods charging more.

And, Steve, I did not assume that the upscale movie would make more money with a lower ticket price. I assumed that, in order to sell out an excessively-large theatre running such a movie, the price would have to be lowered, which is almost axiomatic. I also asserted that if the theatre owner found himself actually doing so, he’s doing it wrong and would make more money if he offered fewer seats/tickets and raised the price – which is what appears to be happening. Note that Arclight charges the same price ($13.75) for both the Meryl Streep biopic and the Robert Downey blockbuster, while showing “Sherlock Holmes” in four times as many theatres.

Steve Sailer January 5, 2012 at 2:06 am

Overall, going to the movies is one of the last simple ways to spend money — a ticket costs about a sawbuck — and people like that it’s simple. Compare that to an experience like buying an airline ticket, where the price of tickets is set dynamically by computers programmed by economists. It takes several hours online these days to try to not get too badly outsmarted by the airlines. If going to the show was that much work, who’d go?

Borealis January 5, 2012 at 3:04 am

It is a requirement of the standard theatre’s contract with the studios. At least analyze the issue at its source.

David de Ugarte January 5, 2012 at 5:45 am

Gary Becker’s model on restaurant pricing coul be interesting as alternative guide for modelizing it.

James N. Markels January 5, 2012 at 11:36 am

Borealis is correct–uniform pricing is enforced by the studios that create the movies and sell the display rights to the theatres. Part of this is because the studios believe (perhaps correctly) that moviegoers value the entertainment of a movie at a fixed price, say, $20. If the ticket is $12, that means the moviegoer is more likely to spend $8 on concessions–all of that money goes to the theatres at an extremely good profit margin. If you lower the ticket price to $10, the studios think that means the moviegoer will buy more concessions, effectively shifting money from the studios to the theatres. They don’t want that. They also don’t want it advertised through price that Movie A is “worse” than Movie B.

But for reasons stated above, while ticket prices are still technically uniform, there are a lot of avenues out there in which the prices are bumped up (IMAX) or down (coupons, etc.). So perhaps the industry is slouching toward uniform pricing.

I looked at this issue back in 2005 and recommended the end of uniform pricing as a way to help theatres be more competitive against home entertainment: http://americasfuture.org/doublethink/2005/10/the-price-of-movies/

James N. Markels January 5, 2012 at 1:00 pm

Another thing: variable pricing need not be based on the quality of the movie. You can have variable pricing on the seats in the theatre. For example, in a 100-seat theatre, the first 25 seats might be sold for $6, the second 25 for $8, the third 25 for $10, and the final 25 for $12. This approach encourages people to rush to buy tickets sooner rather than later in order to capture a lower price, but allows a high-demand movie to capture additional income from those who highly value being able to see the movie now as opposed to later. This approach will automatically result in moviegoers paying less, on average, for low-demand movies, than on high-demand movies, without the theatre or anyone else having to judge the movie based on quality or anticipated sales.

Terry January 5, 2012 at 10:16 pm

Where do they have cheaper indie movies? I live in Phoenix–West Valley. I have to drive 45 minutes to Scottsdale(in light traffic, one way) to see an indie. It costs the same as any other movie in any of the 4 cineplexes within 15 minutes of my house. It’s only cheaper if I go during the the day. It stews me that they can’t/won’t give over an occasional screen for an indie. It’s not like the theaters are crowded most of the time.

RH Sutherland January 6, 2012 at 3:22 pm

A few things.

The huge margins on popcorn are probably affected by sunk-cost bias. Once you have lammed out £40 for your family to get in to the cinema, it seems a bit silly to skimp on popcorn. And the first theatre to try to sell on price would attract a disproportionate number of price-sensitive people who would then be unlikely to buy overpriced soft-drinks and snacks – so you would take a double hit.

Secondly there is signalling. Not only does price signal quality, but your taste for indy films signals a great deal about you. You do not want people to think you are going to an obscure art-house flick because you are too stingy to pay to see Sherlock Holmes.

Thirdly this is not like the airline industry. The discounts in the scheme of things would be relatively trivial, particularly when you factor in the attendant costs – travel, parking, meals out, etc. Lower prices might not drive up demand very much. What would airline pricing be like if (just as cinemas can add or remove seating capacity at will for a movie) airlines could simply reroute scheduled flights to meet demand?

If you were to ask me for advice on how to increase revenue for a cinema, I would not suggest discounting as the first route. I would instead try devices which actually overcome inertia more powerfully, such as groupon, or those which drive loyalty and frequency – rather like the Amazon Prime pricing model.

I generally love yield management – but it does have one downside. When you fly easyJet or RyanAir, the bloody plane is always full. One nice feature of this uniform approach to ticket prices for mild claustrophobics like me is that it does give me one extra level of choice. If I go to the cinema at a silly time, or choose a more obscure film, I do get to see it in a pleasantly empty cinema. Younger cinemagoers than I who may be keen on using the darkness for snogging or mild frotteurism may also see this as a benefit.

Blaise January 7, 2012 at 5:44 pm

It’s not he case in every country. In Paris the price varies according to the location and the time, in New Zealand it varies according to the movie inside the same theater. So I think it’s cultural.

Jalen Mozingo January 15, 2012 at 4:30 am

Enjoyed every bit of your blog post.Really looking forward to read more. Want more.

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