An excellent teachable piece for MBA! The question itself is thought provoking and the answers are interesting, historical and complex. Price discrimination in disguise at the end of article offers several theories that all seem to be relevant
I have paid money to see Mission: Impossible, which made $130 million in the last two weeks, and I have not paid any money to see Young Adult, which has made less than $10 million over the same span. Nobody is surprised or impressed by the discrepancy. The real question is: If demand is supposed to move prices, why isn’t seeing Young Adult much cheaper than seeing Mission: Impossible?
Since the early 1970s, at any given movie theater, one price has been charged for all movies, seven days a week, 365 days a year,” Barak Y. Orbach and Liran Einav begin in their research paper that looks at pricing strategies for movie theaters. This practice — known, wonkily, as uniform pricing — isn’t specific to movies. It’s true for sports, where I pay the same price for a football ticket whether the Redskins are playing the New England Patriots or the St. Louis Rams. It’s also true for music. The fact that Katy Perry is likely to outsell Gilbert & Sullivan this year doesn’t make “Last Friday Night” any cheaper than “I Am the Very Model of a Modern Major General.”
To make successful movies more expensive, you have to know what movies are going to be successful. That’s not as hard as it sounds.
More expensive movies have bigger audiences. There is a high “correlation coefficient” between production costs and gross revenues. Sequels outperform non-sequels. Christmastime outsells Eastertime … and every other time Furthermore, it’s practically a rule of law that big opening weekends predict overall success and that movie revenues fall after the first week.
The first instances of what film archeologists would actually call “movies” around 1910 featured different prices for different films. Movies were priced according to their length, stars, and popularity. For three decades until the 1940s, one theater would have the rights to each movie within a certain zone, and movies received grades (A, B, or C) that corresponded with ticket prices at those theaters. If the rules of the 1920s ruled today, Mission Impossible might be $15 and Young Adult might be $7. What changed?
Everything. For starters, the famous Paramount anti-trust case broke up monopolies between producers and distributors. Multiplexes replaced single-serving theaters. A recession after World War II coincided with the popularity of television to gut studio revenue, forcing them to rely on fewer, more expensive movies.
Forty years later, uniform pricing is uniform practice for movie theaters. And with the onslaught from online streaming, legal downloads, and DVDs, studios and theaters are nervous as heck about pissing off what die-hards they have left by moving prices based on demand. (Although, you could argue that charging more for a 3-D movie is an interesting exception.)
But Orbach and Einav find some evidence that where dynamic pricing was used, both the theaters and the studios benefited. In Japan, tickets for Jurassic Park were profitably sold for a premium of 67%, while tickets for Austin Powers were profitably sold at 45% discount for young audiences. That’s a huge boost for studios, who keep an outsized share of a movie’s opening weekend revenue. Meanwhile, in 1970, some D.C. theaters cut weekday tickets by two-thirds and saw popcorn sales double. That’s a huge boost for theaters, since half of theaters’ income comes from amenities like popcorn.
So how come we’re still stuck with $12 tickets for both blockbusters and indie flicks? A few theories:
1) Theaters do price discriminate already, kind of, but they do it with space. At the multiplex, not all theaters are alike. Bigger movies get more theaters with better technology. Smaller movies get older theaters with smaller screens.
2) 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 meaning of opening weekends.