The never-ending story. As some of you know, I can't get the question about theater pricing out of my head. It bugs me to no end. Why would a firm allow shortages and surpluses to exist indefinitely? When demand outruns supply, shortages form, and firms to exploit the gains will raise prices, which both raise profits for them, but also ration off demand. Prices, in essence, contain vital information which reflect the value of products, their relative scarcity, and the opportunity costs of suppliers. So, by raising the price of a very popular movie, firms would maximize their profits and there would be no more lines for movies. And the reverse is also true - if the movie is a Gigli-level bad, and no one is willing to touch it with a ten foot pole, then why not lower the price? I might not be willing to pay $7 to see Gigli, but I might be willing to pay $1 or $2. And since firms faced sunk costs since they have already reserved the theater and the time for the movie, lowering the price can only increase revenues. It could even have the effect of generating interest in the movie, which in turn could drive future revenues. Yet none of this rational behavior occurs in the market for films. (This is not to say that firms don't engage in price differentiation, because they obviously do. They invest in different sized theaters, which is one way of reducing the supply of seats [the flip side of altering price]. They also have different prices for different customers - elderly and children pay less than adults, and matinees are cheaper than evening films, etc.)
Different explanations have been offered. I won't go into them again, but they include everything from Becker's explanation that the demand for some goods is a function, not of the good's wage only, but also of aggregate demand. Thus, sometimes it's profit maximizing to allow firms to run shortages, because the shortage itself is a signal of the value of the good. I call this the "Club 54 effect." You pay an additional price by waiting in line and the good is more valuable by the fact that so many people want in.
Another explanation is that by lowering the price, firms would essentially signal that the good was defective. And perhaps there is something to this. Bookstores place books in the discount bin because of excess inventory. But films do not house inventory, since they sell something more akin to a service or an experience than a good. Still, in an information age such as ours, it's unlikely that consumers rely on point-of-purchase pricing to determine the quality of the film. Word of mouth and movie reviews are more adequate indicators of quality than price, as far as film is concerned.
So, since I cannot figure out anything, I decided to call NATO again - no, not the North Atlantic Treaty Organization, but rather, the National Association of Theater Owners. This time, the conversation was a bit more revealing, since the last time, the president told me that he couldn't talk to me as it would entail violating antitrust legislation which forbid him to discuss pricing strategies. This time, I was referred to a LA-based consulting company and got to talk to a consultant. I couldn't understand a lot of what he told me, as as we spoke, I realized how little I understood about the business of making movies, the hierarchy of studios to distribution to film houses, and the contracts involved. But, one thing he told me was relevant to my specific question. He said that many studios have what he called a "per capita charge" built-in to the contract which make it unprofitable to lower the price. For instance, Disney may have a per capita charge which states that Disney is to be paid $4.00 for every ticket sold. This would mean that from the perspective of the theater itself, they could never lower the price lower then $4.00, since $4 would represent the marginal cost of selling an additional ticket. This consultant also told me that there were also further regulations within the contract forbidding them of charging different prices, but I did not get to go into too much detail with him at that point as that was the moment Miles began screaming for me to hold him.
So, one angle to take on this question is to focus on the contracts themselves. As I move forward on this, I will try to focus more on this to better understand pricing of theaters.
Posted by scott at November 17, 2003 10:04 AM | TrackBackI don't know if you mentioned this since yor post was so long and I was not motivated to read it all (a blog-post surplus?), but years ago I worked next to a theater where the manager would let us in for free in the late afternoon (after work) if we bought popcorn and a soda. He said that they made their real money on concessions, not the ticket sales.
I don't really know how or even if this would affect what you are saying here. I suppose more filled seats would seem to mean more consession sales, but folks who won't pay $10 for a movie might not pay $3 for a Coke, and early show-goers might be less hungry and not get anything either.
Posted by: bob at November 17, 2003 10:32 AMI've heard this several times (that film houses make their money off of concessions, not tickets), and I need to start looking more into this because it could affect what I'm saying. It makes sense that this would be the case given the high premiums filmhouses must pay to studios in the opening weeks of a new release. Sometimes, studios recoup all of the revenues from the first two weekends. This is becoming more and more common, in fact, from what I understand. If they really do only make a pittance from ticket sales, then lowering or raising them in response to demand may not actually be sensible, since tickets are the main mechanism for profits in the first place.
Posted by: scott cunningham at November 17, 2003 12:18 PMAfter you figure out the theater problem, you should work on the cable TV problem: why do I pay $10 for 12 channels (5 of which I don't want). To get the channels I want, I could pay $45 for 50 channels (still paying for many channels I have no interest in). There must be a way to sell the channels individually!
Posted by: Christin at November 17, 2003 12:53 PMWhen you talk about contracts with studios and distributors, it almost sounds like an odd power arrangement driving the pricing. It seems to me that in most markets the people towards the end of the chain (the retailers and consumers) have the most impact on prices. Perhaps in the film industry, and this is just raw speculation, the culture within the industry says, "gosh darnit, we're the rich and powerful film producers, it's our product, and theatres will charge what we tell them to charge."
Also, since the actual number of physical film reels produced/distibuted is fairly small (a few thousand), the distribution side of things is probably not competitive at all. And profits, to paraphrse Warren Buffett, go to the guy at the narrowest point in the process. But who knows, I might be wrong on all of this.
Posted by: Paul Baxter at November 17, 2003 01:18 PMScott, I don't know if you have mentioned this, but many of the owners/chains have to "blind-bid" on films coming out -- sometimes all they'll have is a trailer (of sorts) or some sketchy outline of a movie, sometimes a year or so out. That's all they'll have to go on. Sometimes the cachet of some "star" will sell it alone. Imagine the chagrin of the owners having blind-bid on that stinker that Affleck and that Lopez girl put out.
It would have been interesting to see how "Star Wars" was flogged to the theatres....
Posted by: John Owen Butler at November 17, 2003 05:05 PMThanks John. I didn't know that. How'd you learn about that? Is there a resource that you know of that tells more about this end of the business?
Posted by: scott cunningham at November 17, 2003 09:19 PMPaul, maybe it is a kind of monopoly situation. There are only a handful of studios, but there are probably ten thousand filmhouses in the United States. So, filmhouses basically are price takers, and have very little power in the negotiations of the films, whereas the studios are more like price-makers. That's kind of interesting. I guess that's a basic kind of relationship, but I hadn't really thought of it before.
Posted by: scott cunningham at November 17, 2003 09:22 PMScott, I heard it several years ago as an explanation as to why movie prices were so high -- it was also linked to information that where theatres made their money was not on ticket prices, but on the awful prices on the concessions. I'll do some checking.
Posted by: John Owen Butler at November 17, 2003 11:23 PMOK, the info is 30 years old, but it may still be somewhat valid:
http://www.texasmonthly.com/mag/issues/1973-05-01/feature4.php
Posted by: John Owen Butler at November 17, 2003 11:30 PMThanks John. Please feel free to send me information like this as you find it. I have such a poor understanding of the business, and I could really use some educating by my friends whenever possible.
Posted by: scott cunningham at November 17, 2003 11:42 PMI know nothing of this business, but I think it would be useful to compare it to other businesses that have similar issues.
For example, the airline industry does have fluctuating prices based on demand, availability and time to flight (however I don't understand why 1 hour before a flight leaves can often be the most expensive time to buy).
Movie theatres also suffer from the inability to recoup any money from empty seats. It's not like they can bargain bin yesterday's screenings. It would make sense to me to price tickets as you describe. Or why not use the option of assigned seating, and you can pay for the better seats. This way, you can buy the cheapest seat, and if the movie is a stinker, and no one else shows up, you can move to the expensive section (like in a hockey game). If the movie is packed, you're stuck with your front row, and the people who paid a premium, get the best seats, and they didn't even have to wait in line. And that solves two issues. The low price = poor quality problem and the demand/availability/price issue. In the end, there are only crappy cheap seats, or super-expensive premium seats. You can choose to wait for another screening or anti-up.
I thought I had more to say, and in the end I just rambled. I haven't even gotten to my theory about 'why' yet. but my money is on contractual agreements with rich studios. Don't studio's own the theatres anyway? Or at least some of them? The more I think about it, it would make so much more sense to have price variations. But you can't think of it from the consumers point of view. (ie, why the hell won't the airline sell me an empty seat for $50, that's $50 they wouldn't have, why can't I barter). I think it is more of a corporate point of view (whatever the hell that means at this time of night)
McK.
They don't. Many studios used to, I think, but antitrust suits broke it up for anticompetitive behavior back in the early 1940s. I don't know the whole story but it's an interesting story I want to learn more about. I think studios cannot own distribution channels, nor filmhouses, and there are limits to the kinds of contracts that studios can have with actors. Previously, studios could almost own an actor, forcing them to only make movies within their studio, or even forcing them to take own really bad projects. You basically belonged to a specific studio. But that's no longer the case, although I don't know the details.
It does seem to be similar to airlines on the surface. Like airlines, there are sunk costs which cannot be recouped and the product being sold is an empty seat. The marginal cost of putting a person in a seat is the cost of a bag of peanuts and a coke. The marginal benefit simply has to be greater than whatever that is for it to be in the airline's business to charge a lower price. But there are also differences, like what Bob, John, Paul and others are pointing out. For one, there's some debate among those of us who comment on this whenever I post about it as to whether theaters get the lion's share of their profits from ticket sales vs. concessions sales. That will have some affect on how they price. Then there's how the contracts are written up. They may actually explicitly forbid price differentiation of the kind we're talkinga bout, and may also have per capita charges built-in making price differentiation unprofitable.
Next semester, I begin my Industrial Organization sequence, and I'm hoping to study this more.
Posted by: scott cunningham at November 18, 2003 01:44 AMYou should check out this article from How Stuff Works. That Marshall Brain knows everything.
Posted by: levy at November 18, 2003 09:46 AMSomewhat aside, responding to the antitrust issues. Is it not odd then that one person (Rupert Murdoch) can own, manage, control and decide the actions of everything from fox news, to fox movies, from the New York Post to the Australian Daily Telegraph to the UK Sunday Times to hundreds of papers around the world, from the TV guide to ESPN to the National Geographic Channel to some hundreds of channels throughout the world to the satellite network that distributes the whole thing. From Buffy to Freddy to Neo; he may not own the movie house, but I’d say he owns the block the movie house is built on. And that might give him the power to tell the movie house who/what/when/where/why and how to price the tickets.
Besides, companies like this (news corporation) probably don't care about the extra nickels they could make tricky pricing schemes. Studio's live and die by what they make off of weekend blockbusters not by the scraps from weekday matinee's.
Posted by: McKormick Astley at November 18, 2003 09:38 PM