New research explains how movie theaters may increase profits by moving away from uniform pricing to variable pricing.
The study is being published in an upcoming issue of the International Review of Law & Economics.
Currently, consumers pay the same price for blockbusters and for flops, for a movie on the Fourth of July and for a movie on a rainy day in January, for a movie on Friday night and for a movie on Monday evening.
"We don't pay the same price for apples and oranges or for a hotel room on weekdays and weekends. There is no solid economic justification to charge one price for all movies, seven days a week, throughout the year," explains Barak Orbach, an associate professor at The University of Arizona's Rogers College of Law and one of the authors on the study. "Under the present pricing model of movie theaters, some money is left on the table."
While the authors recognize obstacles to variable pricing based on individual movies, they argue that premiums for event movies, on weekends and holidays and during the summer do not raise similar obstacles.
"Movie exhibitors would increase their profits by engaging in variable pricing," says Orbach. "The industry's argument that uniform pricing must be the best pricing model because it has always governed the industry is logically weak and factually wrong," argues Orbach, who in another article shows that, until the 1970s, variable pricing governed the industry.
Today, the prime exceptions to uniform pricing are matinee rates and discounted days; however, discounts for seniors, students and children do not represent price differentiation because they uniformly apply to all movies and all show times.
Until the early 1970s, the industry used sophisticated price differentiation schemes based on timing (premiums on weekends, holidays and high seasons) and the film's anticipated demand (event movies, A movies and B movies).
"Recent developments in the motion-picture industry, primarily the improvements of home-theater equipment and the quick releases to cable television and DVDs, should force the industry to reconsider its pricing model," says Orbach. He adds that during the past year quite a few theaters across the country have experimented with variable pricing.
According to the study, the two primary forces that keep exhibitors from adopting variable pricing are distributors' pressures to maintain uniform pricing and concerns that variable pricing would antagonize moviegoers and keep them at home.
Distributors tend to prefer uniform pricing because of the importance of the opening weekend to the commercial success of the movie and concerns that variable pricing would create problems with producers and directors. They are also concerned that exhibitors may use variable pricing for creative accounting that would hurt the distributors' share in box-office revenues.
Under present antitrust law, however, distributors are prohibited from any intervention in box-office pricing, although such intervention may benefit distributors and exhibitors. In practice, the distributors enforce uniform pricing by refusing to deal with exhibitors who experiment with pricing. This practice may be legally questionable, but it has never been challenged in court.
The researchers also explain how exhibitors can overcome moviegoers' perceptions of fairness. "Consumers," explains Orbach, "may resent surcharges but always welcome discounts." He suggests that, to facilitate a smooth transition to variable pricing, exhibitors should start by offering discounts, thereby establishing a variable pricing regime and keeping moviegoers happy.
Finally, the article dismisses the popular argument that variable pricing would be too costly to administer and too confusing for moviegoers. "In the past, moviegoers were sophisticated enough to handle non-uniform admission fees, and there is no reason to believe that today's moviegoers are any less sophisticated," says Orbach.
Orbach's co-author on the paper, "Uniform Prices for Differentiated Goods: The Case of the Movie Theater Industry," is Liran Einav, assistant professor of economics at Stanford University.
Barak Orbach, associate professor of law
Related Web sites: Barak Orbach: http://www.u.arizona.edu/~orbach
The article "Uniform Prices for Differentiated Goods": http://papers.ssrn.com/sol3/papers.cfm?abstract_id=529704
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