Monday, September 18, 2006

Shortages and movie tickets

The Financial Times runs a weekly column called "Dear Economist" by Tim Harford. This letter is on the movie theatre problem: that is, why don't movie theatres raise their ticket prices when they get a blockbuster movie to prevent a shortage or lower their prices when the movie is a bomb.

Dear Economist,

When I go to a restaurant a dish that costs more to make - perhaps lobster or the product of an expensive chefÂ’s imagination - costs more to purchase. The same is true when I go to a clothes store.
However, when I go to see a movie at my local cinema, no matter what the film, no matter how much it cost to make, it costs the same to see.
As I only go to big-budget flicks that have been praised to the rafters, I feel I am being subsidizedd by the poor folks who are watching cheap run-of-the-mill pictures. Why donÂ’t movie theatres have adjustable pricing?
Arthur Spirling, Rochester, NY
Dear Mr Spirling,
You are confused. You are not consuming a film but a film screening, and film screenings cost the same to produce no matter what is in the projector. The price of producing the film in the first place is irrelevant.
Nevertheless, there is a puzzle here. While wshouldn'tdnÂ’t expect big-budget films to command higher ticket prices, these prices should surely vary in an attempt to get every seat in the house full. ItÂ’s not obvious that popular movies should be more expensive: the most popular books tend to enjoy the greatest discounts. But completely uniform pricing is odd.
One explanation is that people might buy a cheap ticket and then sneak into a more expensive screening; but uniform pricing predates the multiplexes. A second explanation, advanced by economist Barak Orbach, is that distributors don’t like to be associated with “discount movies” and so they tell cinemas what price to charge. Since this is illegal in the US, their instructions have to be simple, hence uniform pricing. I prefer the simplest explanation: cheap tickets with minimum confusion is a great way to sell popcorn.

I would also add that theatres do not take in a majority of the ticket revenues. My recollection is that if they sell a ticket for $10 they get on average $4.50 and during the first week that number drops to $3.00. The distribution company gets most of it. Therefore, it is rational for the theatre to "price target"--sell out and then try and get the inelastic consumers to buy popcorn, soda and candy, revenue the theatre keeps for itself.

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