Why don’t better movies cost more?

by on February 24, 2016 at 12:46 am in Economics, Film, Television, Uncategorized | Permalink

This is from an email from Ashok Rao:

You might have addressed this. On iTunes – to some extent – they do, though this appears to matter more with something you might call “scale of production” than quality of movie. Avatar is still at $15 compared to $10 for most others mainstream films (with very crappy and very lowbrow comedies sometimes lower).

But in general it seems absurd that westerns that I’ve never heard about cost as much as Harry Potter. Some points:

Does the movie industry – and ensuing bargaining with important agents like Apple – prefer completely homogenized pricing? Certainly it might be negative signaling that “we know this movie is trash” but that shouldn’t matter after the initial critic and audience review cycle is over.

A lot of crappy movies might make for good TV fodder, though the pricing structures are complicated enough that I have no idea exactly where or how this happens.

The comparison doesn’t even need to be on quality. How on earth does Godfather still cost $15 a pop – isn’t it going to be in the public domain soon?

My gut tells me piracy is a key instigator though I don’t know how exactly. Logically I feel it’s just the opposite. The price elasticity of someone who will not pirate to begin with is much lower than someone who will, on average…

Are there multiple equilibria? 1) Given that the price elasticity of non-pirates is low, you can and should charge them similar rates but 2) Given that pirates are highly elastic it makes sense to price quality.

Is the fact that I’m browsing on iTunes at all enough of an information signal to segregate the market?

It appears Netflix is what will change this entirely, and iTunes prices are completely irrelevant because no one plans on buying Sharknado 2 in HD anyway.

The other interesting question (which also requires a finessed understanding of Netflix economics) is comparing the entertainment value of television vs. cinema on the dollar. It appears there is a “timepass” value to both and a completion value for movies (and TV as well, but distributed over n episodes so basically 0).

One season of TV, which might be about 20 hours of entertainment, is frequently only 2x one movie which might be 2 hours of entertainment. Is the “scale of production” and completeness factor enough to justify 10 hours of entertainment? It is also the case that the median show and median movie are converging in parity on the margin, and increasingly on average too.  – You would have to watch many hours of TV before reaching a cliff in quality where the marginal movie is dramatically better than the marginal show, versus a baseline of the best show vs. best movie.

If you insist on legal purchases only learning to read subtitles on Hindi movies is also a really cheap hack to amazing entertainment – foreign films otherwise tend to be too highbrow though that might be a rather lowbrow thing to say.

These are of course “demand side” factors, though after a reasonable period of time the supply side should largely be a sunk cost and somewhat irrelevant.

By the way, there is a new app –called Atom — which among other things will help groups of moviegoers receive discounts for movies which are doing less well.

And here is my earlier post on the uniform pricing of movie tickets.

1 Steve Sailer February 24, 2016 at 1:12 am

In L.A., I often have to decide between paying $16 to see a new limited release at The Arclight Hollywood right now, $10 to see it at The Plant in Van Nuys when it goes into mass release in a week or two, or $3 to see it at The Regency in North Hollywood about two months.

The better movies will tend to stay in the more expensive venues longer.

2 Ted Sanders February 24, 2016 at 1:16 am

I think any good answer should also explain why the logic that applies to movies does not also apply to video games. Both are digital goods that cost double digit dollars and provide entertainment. Yet they are priced in very different ways.

3 Anon February 24, 2016 at 8:08 am

Games have only really started to be priced significantly differently since Steam came around. Before that, any decent quality game was a pretty uniform price.

4 Sam the Sham February 24, 2016 at 8:15 am

It hasn’t just been Steam – in the days of nagware and shareware, new companies would offer discounts while trying to make a name for themselves, or run specials for bundles of games, or if an old game was tailing off on sales. But in our workaday world of Steam and GOG (I love good old games!!) prices are very dynamic. Even AAA games modify their prices all the time – Sid Meier’s is a famous brand, and their latest game, After Earth… well, they aren’t lowering their price, per se, but it’s almost always on a 50% off or more sale. Reviews were not good, and I feel like I perhaps overpaid even at half off.

The price homogeneity was largely for AAA games developers (so for most console games, yes), and even that’s crumbling.

5 Sam the Sham February 24, 2016 at 8:17 am

I wonder if considering games a Durable Good helps explain it. A lot of games, like the Civilization series, can provide 1000+ hours of entertainment and are still fresh and fun 4 years later.

6 HL February 24, 2016 at 11:35 am

Hell Civilization 2 is still fun 20 years later!

7 JWatts February 24, 2016 at 1:09 pm

“I wonder if considering games a Durable Good helps explain it. ”

I don’t think that explains it. Games show their age quickly due to rapidly changing graphics. So yes, I might well buy the original X-Com, because it was awesome enough to overcome the really bad graphics, but that kind of decision is rare. So, to get buyers the discounts have to be heavy. I might go ahead and spend $2 on an older game, because it’s only $2. If anything, I view games as less Durable Goods than movies.

All that being said, I think that movies should be priced more like Steam games. More of a gradient, less of a step change.

8 KLO February 24, 2016 at 4:02 pm

I don’t see lots of evidence that video games are priced according to quality. In the console game market, almost all games released in physical format are priced ($60) exactly the same upon release. Better, longer games stay at that price longer, but inevitably the price drops down to the $20 level eventually. Smaller games made by smaller teams with less total content are more flexibly priced, but even there quality does not seem the main determining factor.

The free-to-play model has changed this a little bit, but that really is only applicable to certain games. Mostly, prices do not signal quality unless you also know the release date of the game. Audiences have a strong preference for currentness over quality that also pervades the film industry.

9 JVM February 24, 2016 at 1:57 am

I know from talking to people at Amazon that rare, old titles have low price elasticity compared to new releases. Their theory is that most people watching a rare film are looking for a *specific* film and would not prefer to substitute it (e.g., consider what sort of customers watch Hackers or Monty Python’s Life of Brian, unlikely that they stumbled on them at random). So your intuition should be that rarer movies should cost more and new releases should cost less. But new releases are prominent attractors for the non-committal. So it’s not out of the question that current pricing schemes are not so far from optimal.

The TV vs. Movie divide is harder to explain.

10 dr February 24, 2016 at 2:02 pm

This. “Better” is a remarkably weak and simplistic evaluation. The relevant question is why do movies with fewer substitutes not cost more. And, the answer is, they do.

11 BC February 24, 2016 at 2:04 am

Presumably, the barrier to price discrimination is cannibalization: where lower prices, instead of attracting additional marginal customers, instead attract customers that would have otherwise bought the higher price product. If customer preferences are bad, cheap movie > good, expensive movie > no movie, then differential pricing would actually lead to cannibalization rather than revenue maximization. For price discrimination to work, the preference has to be bad, cheap movie > no movie > good, expensive movie, i.e., the cheaper prices have to attract customers that would have otherwise chosen to not watch anything. Maybe, home viewing prices are already low enough that the studios don’t believe that lower prices would attact incremental customers, just customers switching from a more expensive movie to a cheaper one.

12 g February 24, 2016 at 2:08 am

“How on earth does Godfather still cost $15 a pop – isn’t it going to be in the public domain soon?”

My understanding is that the Godfather movie will remain copyrighted for another 51 years under the current law.

13 Benny Lava February 24, 2016 at 8:43 am

That was my understanding as well.

14 John Hall February 24, 2016 at 9:37 am

I paid like $100 for the three part DVD set when it first came out. $15 a pop is a discount.

15 Jason Bayz February 24, 2016 at 2:18 am

If a theater were to reduce the price for a movie and it resulted in attracting more customers to that movie, it would be counterproductive if most of those customers would have ended up seeing the better, more expensive movie if the price had been the same. When people go to the movies, it’s generally because there’s a really good movie they want to see and/or because they want to “go to the movies” as an experience and social activity. The crappier films count on the second group. Are you going to attract many extra customers by offering a 4$ discount on the unknown, crappy films? I don’t think so. Giving people good deals only works if you are trying to expand your customer base, if you’re just cannibalizing one part of it you end up losing money.

This leads to another question, why don’t the producers of popular movies demand a better deal from the movie theaters? According to slate.com, every deal varies, but it’s generally a 50-50 split between the theaters and the studios. It may be that the movie theaters and movie producers have decided that such negotiations would be more trouble than they are worth. People would get angry if they couldn’t see the latest blockbuster at their local movie theater because of a dispute between the theaters and the producers. Since both parties are so dependent on one another, they have a strong incentive to get along and avoid stand downs.

http://www.slate.com/articles/arts/the_hollywood_economist/2006/01/the_popcorn_palace_economy.html

16 Bfin February 24, 2016 at 2:55 am

“This leads to another question, why don’t the producers of popular movies demand a better deal from the movie theaters?”

The answer to your question is that they do. Here’s a simplified example of how it works:

A theater is showing ten different movies this weekend. Nine of those are projected to produce $10k in ticket sales, while the tenth is projected to produce $10k by itself. Generally, you can say that there is a 50-50 split because that’s the deal for those nine movies, despite that tenth money-making movie having a 90-10 split in favor of the studio.

17 Albigensian February 24, 2016 at 10:22 am

But, the economics of a movie theater are very different from those of streaming or download, as the theater makes much of its money from the concessions.

18 JWatts February 24, 2016 at 1:17 pm

“…but it’s generally a 50-50 split between the theaters and the studios. …”

The percentage is high in the studios favor for the first showings and declines as the weeks go by. The 50-50 split is roughly the average for all movies over all the weeks shown. No theater got 50% of the ticket for the first week that the new Star Wars was out. They probably got 10-20% of the ticket price.

http://www.rogerebert.com/letters/how-your-ticket-price-is-divided

19 Nathan W February 24, 2016 at 3:00 am

If you buy a DVD in a shop, prices are different. The crappy movies might sell to people who are shopping for other stuff and reason “hey, $0.99/$5, why not check out one of these movies?” – an impulse purchase. The retailer will not suffer from the cannibalization problems referred to by some other commenters – if you go to iTunes to buy a movie, presumably you’re fairly dedicated to buying a movie by the time you’ve started the search, and the only question is which movie.

Re: TV/movie differential. Sticker shock? People are hardly going to buy a TV series one episode at a time, so what else are the producers or retaliers to do than to sell the whole series and sell if for $10-20, not $50, which almost no one will pay? Also, because marginal consumption on TV is perceived as costless, people will attribute a lower “reasonable price” to a TV series compared to an equivalent amount of entertainment value from movies.

Also, with so much content these days, I don’t think many people are re-watching movies and TV shows. Why are people paying the purchase prices of yore across many movies when their actual consumption (watch it just once) suggests that renting would have been their preferred consumption behaviour? Buying movies only ever made sense to me in the contexts of a) movies for young children which they rewatch many times or b) you borrow and lend movies with friends/family. Shouldn’t people be streaming for a couple/few dollars and not buying for ten? In an age where practically everyone has their own devices, I don’t imagine many people are treating their friends/family to peruse their iTunes collection on movie night, something that would make it socially desirable to amass a collection. So why are people buying movies at all instead of cheaper streaming?

20 AndrewL February 24, 2016 at 8:27 am

It’s a person’s natural desire to “collect” things. Also, I like to buy digital movies to take with me on trips where high speed broadband is often unavailable. It’s easier to take 100 movies on a tiny portable HD than 100 DVDs.

21 Anonymous February 24, 2016 at 3:18 am

My feeling is that the movie companies keep prices of old an crappy movies high for the same reason they want overly long copyright terms even if no-one is really making any real money selling copies of 50 year old obscure films; to keep the competition away. If old and/or crappy movies were very cheap or – god forbid – even free, they would perhaps provide a reasonable substitute for new and expensive films.

It shouldn’t be a surprise that if we give a monopoly over a class of products to someone, we end up with nonsensical prices.

22 prior_test1 February 24, 2016 at 5:09 am

‘they would perhaps provide a reasonable substitute for new and expensive films’

Back at the very beginning of the smart phone era in Europe (think at least 5 years before the iPhone), market analysts were pointing out that to be successful, these devices would have to supplant something else – that is, basically there was no more free time available in a typical person’s schedule to be filled by something like the services offered by those phones. As it turned out, that perspective was fairly accurate, at least in the shorter term. Today, of course, the smart phone (wireless tablet/book reader, at least in countries where ‘tethering’ is an unknown concept) offers the ability to supplant listening to music on a separate device, taking pictures with a separate device, accessing the Internet with a separate device, reading a book, watching a movie or TV in bed, and so on.

Of course the movie industry wants to be paid for their current efforts without fearing losing money from competition from decades of movie making. The movie industry is smarter than the music industry after all – or possibly, just luckier. The 80s were a golden age for the music industry, due to the format shift from vinyl to CD – what the music industry did not grasp is that digital data is infinitely copyable, and thus the very reason they were rolling in cash in the short term is precisely what killed them in the long term. Music fans simply removed the record companies from the picture – in the end, with the more than willing help of the Internet’s most profitable ad network.

23 prior_test1 February 24, 2016 at 4:59 am

Wow – the variety of ways not to paying to watch a movie online continue to grow, particularly among people under a certain age (call it 30, for fun).

That group is unlikely to ever pay any price to see a movie online (particularly in countries that are not the USA, since so much American content is not available from American sources for international viewers) – whereas among people above a certain age (call it 45, again for fun), remain willing to pay a familiar price, just as they have always done.

The film industry was better than the music industry in protecting itself (including being aware enough of RIAA’s various missteps to remain less hated), but their tide remains in ebb flow regardless.

This also applies to the price of DVD/Blu-Ray discs – very few people buy such anymore (at least in Germany), so why even bother reducing the price? It won’t be made up by increased volume, not at this point.

24 Nathan W February 24, 2016 at 5:37 am

At the end of the day, if no one is paying for the content there will be no content worth consuming. People who pay for content understand this, but free is just so appealing …

Like in a lot of the arts and media, the monetary transaction is not just a normal transaction, it is also voting with your dollars in support of the content that you want to see more of. As a (formerly active) musician, I recall some shows where some patrons in pay-as-you-can events leaving absurdly large payments, finding $50 bills in the pot at the end of the night. This was clearly designed to encourage us to make more of the same – they could have paid $0 and no one would ever have known.

This gets clouded by middlemen such as Apple taking massive cuts, and some people would rather download for free than pay out so much to the middleman, who they see as contributing virtually nothing to the process other than creating some sort of listing. The option always exists to download the content illegally and then to visit the artists’ or production companies’ website, and to find some other way to support them.

25 prior_test1 February 24, 2016 at 6:03 am

‘if no one is paying for the content there will be no content worth consuming’

Which is the real crux here. Expanding the public domain is the explicit goal and justification of the government granted monopoly that copyright represents. And as noted on Jan 1, 2016 at https://web.law.duke.edu/cspd/publicdomainday, ‘What is entering the public domain in the United States? Not a single published work. Once again, no published works are entering the public domain in the United States this year. Or next year. In fact, no publication will enter our public domain until 2019.’

Providing artists a pittance for their work has a long tradition – just ask anyone in the entertainment industry how that works in any number of cases. But a pittance still remains more to live on than nothing, obviously.

None the less, the balance which justified granting copyright as a monopoly is horribly distorted in favor of those that control an industry (limited terms that last one day less than forever are fine, for example – https://en.wikipedia.org/wiki/Eldred_v._Ashcroft ). However, those in control are not the same people as those that create the work we enjoy, obviously.

How this turns out will have winners and losers, of course. One can only hope the entertainment industry as represented by the last century in the U.S. is a loser, while something like archive.org is a winner. For most artists, most of the time, it will probably look pretty much the same whatever happens. (With the notable exception of the recorded music industry – the period between the 50s to 80s represented a jackpot unlikely to be repeated in the future, regardless of boomer nostalgia about how things were decades ago.)

And there will always be things created worth enjoying, regardless of money. Humans are like that – as anyone using Linux (or the Internet) knows from direct personal experience. Money certainly plays a role, but it is just one factor in that ever so cliched human equation.

There is a reason that the public domain is not expanding in the U.S., and it has nothing to do with paying artists. Meaning that much content worth enjoying remains locked away, unable to be used by artists today to create new works. The sad history of sampling shows how that works in practice.

26 rayward February 24, 2016 at 6:23 am

It’s not the movie, it’s the movie theater. People go to the movie theater for the entertainment; the movie itself is secondary. Why else would someone go through the inconveniences of watching a movie in the theater. It’s definitely not for the popcorn. And most of the time it’s not for the movie, quality being rare. Seinfeld captured the allure of going to the movie theater with friends: it didn’t really matter which movie they saw, but it did matter that they went to the movie theater together. A related issue is why people stand in long lines to be the first to see a new release? Who cares whether you are the first or the last to see a movie. It does if being first enhances one’s status. Among certain people, being the first to see a movie, the first to get the latest version of an i-phone, enhances one’s status. All of this helps explain why the quality of the movie has little effect on the price charged by the movie theater. If quality mattered, the popcorn would be free.

27 chuck martel February 24, 2016 at 9:20 am

Their status isn’t enhanced, their self-image is. No one knows if they’ve seen the latest Star Wars production unless they tell them about it. A big part of the phenomenon is the infatuation with the “new”. This is obvious in many things, movies, books, clothes and consumer goods.

Another factor is being part of a shared experience. People that have no understanding of ice hockey enthusiastically attend expensive NHL games not to witness a mysterious hockey contest but to be one of a crowd of 17,000 in a big building with a collective desire.

28 kimock February 24, 2016 at 6:57 am

Planet Money did a nice segment on this a couple years back. Recommended.
http://www.npr.org/sections/money/2014/07/11/330680385/episode-552-blockbusters-bombs-and-the-price-of-a-ticket

29 Jack PQ February 24, 2016 at 9:09 am

Not to sound glib, but I think price elasticity of demand explains all of this pretty well. Bad movies cost about as much as good movies because lowering price for bad movies would not generate much income (you either want it or you don’t). But with good movies, there are many customers who can be enticed by lowering price. So good movies end up with a low price relative to quality, and bad movies end up with a high price relative to quality. I.e., the prices are about the same.

30 chuck martel February 24, 2016 at 9:27 am

Movies are perhaps the most expensive art form ever devised. The production of a modern film involves the work of hundreds of well-paid artists and technicians and the use of expensive equipment, frequently in exotic locations. The real wonder is that any bad movie is ever made. Considering this, it’s not difficult to realize that other projects, such as government programs, should be failures when the people implementing them are mediocrities, the talented being involved in other, more lucrative challenges.

31 Jay February 24, 2016 at 12:51 pm

I don’t think its a wonder, “bad movie” is a relative term and will always be around no matter how good movies get. I think it is generally true that “bad movies” have gotten better over the years for just the reasons that you cite but they’re still bad movies that bomb at the box office.

32 Dan C February 24, 2016 at 9:28 am

At the theater, it’s like a buffet. You are only going to eat so much, and some foods are more popular than others (some foods drive the decision to buy the buffet in the first place), but they are all priced “the same”. That’s why movies tend to be released in clusters – Christmas and Summer – because that is when people show up in the theaters. All theaters carry more or less the same movies. Notice that they don’t really enforce which individual theater you drop into (unless one is sold out, but even then enforcement is lax). You are buying a bundle of entertainment, not the movie itself.

On DVDs, Netflix, and iTunes, the complex release windows offset the lack of variation in pricing. But again, you only have a limited number of hours to watch TV (some people are more limited than others). Therefore, you still are buying a bundle.

33 Joe February 24, 2016 at 10:21 am
34 Hazel Meade February 24, 2016 at 11:49 am

Better is subjective. I would tend to agree that the best movies are cheap compared to Avatar, but from a business perspective, “better” is what rakes in the most cash, and judging by audience preferences, that means superhero films with lots of special effects.
The studios are going to spend the most money on the films that they expect to make the biggest profits. Hence, more vulgar (worse) movies cost more, and “better” ones cost less.

35 Daniel Barkalow February 24, 2016 at 1:48 pm

I think you have to consider that people often first decide between seeing a movie and doing something else, and then decide which movie to see. At that point, they don’t want people to see a bad movie for less money for several reasons: (1) they’d get less money, and the consumer is unlikely to use the money saved to see more bad movies; (2) the consumer is less likely to enjoy the experience, and therefore less likely to decide to see a movie in the future; (3) the costs of showing a movie are generally unrelated to what the movie is, aside from special stuff like IMAX or 3D. A better question is why they show bad movies at all, and the answer is that some people like them anyway. But that means that the “bad” movie isn’t any worse than the “good” movie for those consumers who would like it, so they’re priced the same, although only available in places where all the movies don’t cost a lot.

36 Adam February 24, 2016 at 2:44 pm

Movies are imperfect substitutes for each other, thus enjoy some degree of market power (in addition to that conferred by their copyrights).

37 extramsg February 27, 2016 at 6:01 am

Maximizing profits and the elasticity of demand.

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