Wednesday, February 24, 2016

Why do movie theatres charge the same prices for good and bad movies?

An interesting post from our friends at Marginal Revolution, who come up with at least five possible explanations.  My favorite is that it would require higher policing costs as people would buy cheap ticket and then sneak into the more expensive movies.  I suspect that the most likely answer is that once a movie theatre realizes demand is low, they cannot lower the price to reflect demand because doing so would create incentives for patrons to wait past opening week, and then buy a discounted ticket.








11 comments:

  1. Sounds like the cost to protect and guard the supply room is higher than the cost of the stolen pencils, pens, and printer paper.

    Blake

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  2. Now that we are on the topic of movie ticket pricing, I have a question on the cost of popcorn.

    Why does popcorn and as a matter of fact, all concessions at the movies cost so much? $10.00 for a tub of puffed pieces of corn? $6.00 for Rasinets and $4.00 for water?

    How can movie theaters charge such outrageous prices?
    The easy and incomplete answer...Because they can ..of course !!

    This is what I intuitively assumed, that theaters are taking advantage by charging high prices to a captive audience. Putting themselves essentially in a monopolistic position
    Since they don’t allow you, theoretically, to bring food into theaters, they can pretty much charge what they feel the market will bear and living in NYC - Indeed, they do.

    The truth is, movie theaters don’t make much money from movies. Movie studios do.
    The film industry will charge movie theaters upwards of 70 percent of the box office revenue. Revenue sharing schemes change over the years – sometimes studios take a peak percentage from the first few weeks and then adjust downward, sometimes they take a peak percentage from the best few weeks regardless of when they occur – but the outcome is the same: Studios take far and away the biggest chunk of ticket proceeds.

    At the same time, costs like rent, air conditioning and heating for large spaces are significant. And every few years there’s some new amenity or technology no theater can do without: surround sound, stadium seating, digital and 3D projection systems. Each requires hefty investment that brings down profit margins.

    The one thing that does not have to be shared with studios: concessions.
    While concessions account for only about 20 percent of gross revenues, they represent some 40 percent of theaters’ profits. Even with $10 tubs of popcorn, and profit margins on concessions of 85 percent, profit margins for a whole theater average around 4.3 percent for the industry.

    In theory, they will charge a price for popcorn where the spread between what it costs them to make another box of popcorn, and what consumers will pay for that box of popcorn is at its highest level.

    Achour, Sabri-Ben (2016) http://www.marketplace.org/2014/08/04/business/ive-always-wondered/why-does-popcorn-movies-cost-so-much

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    Replies
    1. You make good points about the fixed costs associated with owning a theater (rent, heating, etc), so it makes sense not to try to impact those costs by changing ticket prices and monkeying with the usual flow of customers into the movie house. You also make a great point about the profitability of the concession stand and how it seems that movie theaters are making huge profits through that revenue stream. It always amazes me at how much junk people are willing to buy when they go to a movie and what a staggering premium they will pay for it.

      One thing that has not been mentioned so far that movie theaters do is offer discount tickets through third parties. These include reduced price tickets through AAA, New York State Public Employees Unions, and other third party companies like the Entertainment Book. These tickets are usually reduced by as much as 50%. My feeling is the reason for this is the movie chains know that they will make it up in concession sales, so it is not really cutting into their bottom line.

      To make up for the reduced ticket sales price, the chain will often restrict the usage of the coupons. I have regularly seen signs stating that discount or free passes may not be used for the first two weeks of select movies. I believe this is do to the percentage of each ticket price that goes back to the studio during these high volume periods.

      Bottom line in the end, is the movie house is going to make their profits somehow and the ore people they can put in the seats, the more money they make. Especially when those people succumb to the promise of highly overpriced popcorn and soda.

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    2. You both made some great points! Also, another point I want to bring up is the fact that not everyone is interested in the same types of movies. You and I may have different tastes as to what is good. It is important to think about the demand for different genres of movies. If some movies don't sell as well as others it could be because it isn't a good movie, or not as many people are interested in that genre of movie. The movie theater also can't lower prices on movies if it isn't doing well because people would wait to go and see the movie until the price dropped. Since there are enough ways to get a discount, many of which were mentioned already, people can find ways around paying full price.

      The cost of overhead; building expenses, employees, and other expenses included in running a business must be paid for. They can't make little revenue and keep a business running. The concessions are where they make most of their money to keep the business successful. The fancier theaters with the recliners are paid for by reserved seating and the concessions. This is why people will still pay full price to see a movie even without knowing if it's good or bad. They like the luxury experience.

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  3. I think that theatres charge the same price for all movies shown at a given time due to a combination of all five reasons noted in the article posted on Marginal Revolution. The main reason being that a premium is charged at the opening debut for those who want to be one of the first to see the movie, generating a larger profit for the short term. However, if you can wait to see the movie, odds are you will be able to save a few dollars after a few weeks. There are also times during the day, such as a matinee, or different days during the week where tickets are priced lower in an attempt to increase customer volume. Still, all movies being shown at the same time are usually priced the same. It makes sense that if the ticket cost of the movie right next door to a big blockbuster movie is lower, it might create incentive for customers to buy the lower cost tickets and sneak into the higher priced movie. Additionally, the price the theatre charges for tickets is also reflective of the costs associated with maintaining the theatre and investing in necessary equipment. Due to the digital film requirements, many theatres in western New York have closed, as their revenue was not enough to justify making the investment in new equipment, which would also drive the ticket price up.
    Regarding the high cost of snacks and beverages at the theatre, these items do generate profit for theatres since they do not have to share snack revenue with the movie studios.
    Leshi, N., (2012), The Best Time to Go to a Movie Theatre. Retrieved February 25, 2016 from http://nickleshi.blogspot.com/2012/05/best-time-to-go-to-move-theater.html

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  4. Another factor which affects the pricing of good movies versus bad movies is the effect of commonly owned substitutes. Since the movie theater in effect “own” the movies it shows, pricing one movie lower than another could potentially cause customers to flock the cheaper movie (Froeb, McCann, Shor, & Ward, 2014, p. 140). That would result in profits being syphoned from one product - good movie - by another - bad movie.

    What I would be curious to find out is whether the distributors of the movies charge the movie theaters the same rate regardless of what the picture is. For example, does the distributor charge the same price for a sure-fire blockbuster as it does for a riskier movie? If there is a discrepancy in pricing, movie theaters should consider pricing movies differently in order to maximize their possible profit.

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial economics: A problem solving approach. Australia: South-Western Cengage Learning.

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  5. When looking at the price of movie tickets and the possibility of changing the ticket price considering the demand of a movie opens up a loop hole as stated for those to purchase a ticket for a movie not in demand and then go see the blockbuster that has higher priced tickets. This tiered system of pricing would be opening the door by the movie theaters to lose revenue while adding costs to maintain order and police the system with added personnel.

    As mentioned in the other comments on this post, a theater makes its money off of the concessions that it sells. The reason for the price increase is not different then going to a concert venue or sporting event where the mark-ups are excessive but yet the demand to pay is there. When looking at a movie theater and the concessions being a complementary good, the higher a ticket price, the less likely those paying a premium price are to buy concessions at those prices.

    When looking at the five theories by Tyler Cowen, they all make sense as to why movie theaters don’t tier their ticket prices based off demand and popularity. When it comes to movies, it carries an expense for consumers and the movie theater themselves. Looking at the five theories, the sneaking into a movie seems to be the one big concern that if I was a movie theater I would worry about most. Two other things that a movie theater would have to worry about as Cowen states is a consumer would go travel to another theatre to watch a movie at a lower priced theater but also you run the risk of creating customer outrage at the ticket prices for movies in demand.

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  6. There are several price discrimination schemes at movie theaters. Newer theaters can address the economics of bad movies in a few ways. First, they can show the bad movies in smaller theaters within the multiplex. They can offer fewer showing times, which would give them more time and space to show popular movies, which will generate more revenue from increased viewers. Or they can show the movies at less popular times. Theaters do price discriminate for seniors, children, and students. They also price discriminate during off-peak hours. Tickets are usually cheaper before 4 p.m.

    Furthermore, while there is a standard price for all movies at any single theater, prices vary from theater to theater and region to region. Ticket prices are usually more expensive in large cities, like Manhattan, as opposed to smaller cities like Syracuse. Regal Cinemas will usually be the most expensive. AMC is relatively close in price to Regal. But there are discount theaters that will show movies that are a couple weeks old for discounted prices around maybe $7 or $8, as opposed to the $12 or $14 at a mainstream theater. And even cheaper still, while relatively rare today, there are still “dollar movies” that show movies about to be released on pay-per-view for $3.

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  7. One thing is that Hollywood does not know how a movie will perform at the box office. More expensive movies tend to have bigger audiences and the vice versa, so there seems to be a correlation between production costs and movie pricing. From the economists view point, demand for theater tickets is elastic, because there are now very good substitutes to watching movies in studios and theaters. With the prevalence of online streaming, legal downloads, and DVDs that tends to offer average stable prices, studios and theaters have become skeptical about varying ticket prices.

    According to Tyler Cowen's article " Why is there uniform pricing for movie tickets," he stresses that 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 momentum of opening weekends. Ticket price can repel as easily as it attracts, because it serves as a signal of the movie quality. For example, considering different movies for $6, $10, and another for $12, fewer people will see the $6 movie because they will assume it is non-quality.

    Although, the industry considers price discrimination as more offers or opportunities for other movie theaters to steal each others' audience, the article dismisses the popular argument that variable pricing would be too costly to administer and too confusing for moviegoers.

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  8. Some of the points raised in the article are interesting, especially the notion of increased policing. Perhaps the real issue is that it is time to change the model of film distribution in the U.S. The model of the “multiplex” theater system actually started in 1915 when two neighboring theaters joined together, through a single entrance. This has evolved into the “megaplex”, offering different movies playing simultaneously on dozens of screens. Throughout its evolution, its major competitor was the small, neighborhood, single-screen theaters that had difficulty competing. Now, however, these theaters have competitors in nearly every U.S. home in the form of on-demand cable and satellite services, internet based services like Netflix and Hulu and almost every smart phone and tablet in the U.S.

    As the article points out, if there is a bad movie playing on a screen and it costs less than the blockbuster film playing next door, a less scrupulous movie-goer may buy the ticket for the cheaper movie but attend the blockbuster. This begs two questions; 1) why wouldn’t the theater owner install an inexpensive electronic security system to ensure that only ticket holders for the blockbuster are allowed in?; 2) why would a theater owner allow a bad movie occupy a screen and allow its profits to be impacted?

    The other issue is film distribution. Whether film makers want to admit it or not, there are just some films that are not meant for the “big screen”. Some movies can be distributed for less through on demand service. Although the audiences may not be as large, the film has the potential to be more profitable due to the reduced distribution cost and the increased convenience for the consumer.

    Reference

    Wikipedia https://en.wikipedia.org/wiki/Multiplex_(movie_theater)

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  9. Uniform pricing occurs when there is no price variation due to demand. If the movie industry switched to variable pricing, many believe that profit would increase. Variable pricing would be based on show times, days of the week, weather, holidays, as well as the popularity and quality of a film.

    But the movie industry has many arguments against the change. The industry argument is that uniform pricing is the best pricing model because it has always been that way. This is an inaccurate statement as uniform pricing was only introduced in the 1970’s.

    Legal limitations between distributors and exhibitors restrict competitive bidding. Distributors cannot be involved with box office pricing. With variable pricing, distributors also believe that they will be more affected by a change in demand. On the filmmaking side, distributors argue that variable pricing will cause further issues in terms of payment with producers and directors. “Creative” accounting on the exhibitor’s side may also cause problems.

    In terms of the consumer, it is the belief that variable pricing will “antagonize” moviegoers and keep them from attending movies altogether. Increasing prices for certain movies will cause the consumer to feel taken advantage of and treated unfairly.

    References

    Orbach, B. Y., & Einav, L. (2007). Uniform prices for differentiated goods: The case of the movie-theater industry. International Review of Law and Economics, 27, 129-153.
    Thoma, M. (2006, December 23). Why Don't Movie Theaters Have More Variation in Their Prices? Retrieved from Economist's View: http://economistsview.typepad.com/economistsview/2006/12/why_dont_movie_.html

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