Sunday, November 3, 2013

Going to the Movies: The Story of a Money Pit (Part 1)

I love movies. Love to sit and watch them at home. Love to have movie nights with my friends. Love going to see them at the theater. On that last one, I think we can all agree on one thing: movie theaters are money pits. Essentially you just walk up to their front door and start throwing all of your money at them. You bitch and moan but you accept it. You knew before you ever left your house that you were going to spend an exorbitant amount of cash for a load of calories and an unknown experience. With my frequent trips to the theater and the resulting cash outflow I got to wondering why. In an attempt to answer this I took a step-by-step approach, looking at a typical trip to the cinema.

According to the National Association of Theater Owners, the average cost of a movie ticket in the U.S. rose to from $7.96 in 2012 to $8.38 in 2013. Granted, this rise is due, in part, to rising surcharges for 3D, IMAX films, and “luxury cinemas;” it is also indicative of an overall rise in movie ticket prices. When I fired up a few of my favored scholarly search engines, I found literature mostly on the movie industry itself but a surprising lack of literature on movie ticket prices, regional differences, surcharges, etc. There are a few papers that address movie ticket prices in terms of economic theory, but that’s kinda it. These papers look at cost-based explanations for why there is one price for all movies, all the time. It is what economists call “uniform pricing for differentiated goods,” which is usually compared to a price differentiated or variable pricing system.  Sure, there are senior and student discounts as well as matinee rates (so called “third degree price discrimination”), but in general, each moviegoer pays the same price for all movies at any time. Theater quality, seat location, quality of the movie, etc. – same price.

A paper by Rosen and Rosenfield in 1997 argues for an optimal two-part pricing system where consumers with the greatest demand buy higher priced tickets to earlier performances, a strategy that was propositioned around the same time by Universal CEO Edgar Bronfman. A scheme that was obviously not adopted. Papers published in 2001 and 2007 by Orbach and Einav examine and support the argument that theaters could benefit from price differentiation across movies and show times. However, they point out that uniform pricing may persist because consumers may perceive variable pricing as unfair, that the short life cycles of movies make it difficult to adjust prices, and the difficulties continue between distributors and theater owners. The latter is examined in more detail in a publication in Marketing Science by Eliashberg, Elberse, and Leenders that reviews the process of movie making and distribution. In the Exhibition section of their paper, they describe the contractual arrangements between distributors and cinemas and pay special attention to the relative powers of these two parties. The distributors’ power lies in the expected success of a particular movie and the amount of promotional support they are willing to commit. The theaters’ power lies in its location and relative shortage (or surplus) of available screens. Overlying all of this is the uncertainty of demand and it filters down into ticket prices. These prices are a dance between the distributors and the theaters. Theaters often prefer lower ticket prices to compete more effectively with other theaters. This has the knock-on effects of increasing attendance and revenues from concessions. Naturally, distributors want high prices and have even actively sought, although largely unsuccessfully, to increase their revenues through variable price structuring. To sum up, how much you pay at the box office essentially comes down to how consumers value goods, the legal constraints on the relationships between distributors and theaters, and the negotiations that occur between these parties.

So now you’ve purchased a ticket which is considered low by both the distributers and the theaters. Okay, we’ll go with that. Next, you walk inside to hear the pop-pop-pop of the popcorn machine, the whoosh of the soda dispenser, the lights of the menus and candy displays, and the oh-so-mouthwateringly good smell of butter. Yep, you are faced with the concession stand and the high prices that go along with it. You know those “low” ticket prices the theater owner has negotiated for you? They are offset by the sale of these concessions, revenues that are not shared with the movie distributors. Also, most theaters bar you from bringing your own food and exploit your immobility by charging high prices for their products. So how likely are you to buy those tempting confections? A paper published in Economic Inquiry back in 1991 looks at these high prices, pointing out that “if all movie viewers ate popcorn at the movies and ate the same amount, the question of pricing at the concession stand would be of little interest. The only thing that would matter would be the combined price of the ticket and the [refreshment].” But in actuality only a fraction of customers purchase concessions and by charging a high price the theater is able to extract consumer surplus.

A study by Gil and Hartmann in 2007 took a look at the role and determinants of concession sales using data from 22 Spanish theaters in 19 cities (11 provinces) between January 2003 and April 2005. This data set contained information on weekly concession sales, box office revenue, and attendance including tickets sold through 5 different selling channels. They also collected information on different markets and local theater characteristics that may relate to concession revenues (population, unemployment, advertising, etc.). Their data shows a strong correlation between theater attendance and concession sales. I would say that is pretty logical. They also associated concession sales with three broad categories of factors:

  1. Channels of Ticket Distribution - For this they divided ticket sales into two categories: tickets sold at the box office and tickets not sold at the box office (further divided into subcategories). They found that people that don’t buy their tickets at the box office spend more on concessions, specifically those people that buy their tickets at home on the Internet or at kiosks.
  2. Audience Composition -  For this category the authors looked at the number of tickets per transaction. Basically, group size. According to their results, if you go to the theater as part of a large group you’ll probably buy more concessions than if you are in a small group. This relationship stands even considering that people in groups tend to share their concessions. 
  3. Theater Characteristics - Large theaters, measured by number of screens and seats per screen, tend to sell more concessions than small theaters even after controlling for attendance. They also found that theaters located in highly populated cities collect less revenue from concessions. Theaters located in cities with higher unemployment rates have lower concession sales, and theaters located in cities with a larger number of commercial activities per person have higher concession sales. Put together, it may actually be local characteristics that are the more important determinant of concession revenues.

Gil and Hartmann also published a study in Marketing Science in 2009 looking at metering price discrimination, a second-degree price discrimination scheme. Basically, “aftermarket goods” (i.e., the concessions) are set well above cost and the customer’s intensity of demand for these goods provides a meter of how much they are willing to pay for primary goods (i.e., the ticket or admission price). The authors created a model (they call it simple, I call it a headache-inducing mathmare) and fed in some available data on concession sales, box office revenues, and theater attendance (again from Spanish theaters). Their results confirmed the presence of the demand conditions for metering with high priced concessions extracting more money from people willing to pay for the admission ticket. Although, they are not sure if theaters are consciously trying to discriminate across customers with their concession pricing strategies. I’m gonna call it getting as much money possible from people willing to pay it.

I've divided this journey to the movies into three parts. If you've made it this far you’ll know why. At this point I’ll leave you with the argument for a new, more current study. A study (likely multiple studies) that take into account the impacts of the most recent recession on prices, the rise of theaters such as the Alamo Drafthouse (which serve dinner and cater to cinephiles), the influence of independent theaters, the increasingly health conscious consumer, and the rise of digital technology (and the associated surcharges), among other things.

 See you soon so that we may choose what to purchase at the concession stand and then we'll make our way to our seats for the movie.

ResearchBlogging.orgSherwin Rosen and Andrew M. Rosenfield (1997). Ticket Pricing The Journal of Law and Economics, 40, 351-376

ResearchBlogging.orgBarak Y. Orbach and Liran Einav (2001). Uniform prices for differentiated goods: The case of the movie-theater industry Harvard Law & Economics Center, Olin Discussion Paper 337 (Harvard University, Cambridge, MA) DOI: 10.2139/ssrn.290813

ResearchBlogging.orgBarak Y. Orbach and Liran Einav (2007). Uniform prices for differentiated goods: The case of the movie-theater industry International Review of Law and Economics, 27, 129-153 DOI: 10.1016/j.irle.2007.06.002

ResearchBlogging.orgJehoshua Eliashberg, Anita Elberse, and Mark A.A.M. Leenders (2006). The Motion Picture Industry: Critical Issues in Practice, Current Research,and New Research Directions Marketing Science, 25 (6), 638-661 DOI: 10.1287/mksc.1050.0177

ResearchBlogging.orgPascal Courty (2011). Unpriced quality Economics Letters, 111 (1), 13-15 DOI: 10.1016/j.econlet.2010.12.009

ResearchBlogging.orgJohn R. Lott and Russell D. Roberts (1991). A Guide to the Pitfalls of Identifying Price Discrimination Economic Inquiry, 24, 14-23 DOI: 10.1111/j.1465-7295.1991.tb01249.x

ResearchBlogging.orgRicard Gil and Wesley R. Hartmann (2007). The Role and Determinants of Concession Sales in Movie Theaters: Evidence from the Spanish Exhibition Industry Rev Ind Organ, 30, 325-347 DOI: 10.1007/s11151-007-9139-7

ResearchBlogging.orgRicard Gil andWesley R. Hartmann (2009). Empirical Analysis of Metering Price Discrimination: Evidence from Concession Sales at Movie Theaters Marketing Science, 28 (6), 1046-1062 DOI: 10.1287/mksc.1090.0494

Ticket pricing info via ScreenCrush

(image via GeekTyrant)
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