Wednesday, February 15, 2006

Variable Pricing at the Box Office

Most movie theaters price discriminate--that is, theaters charge various prices for the same product based on willingness to pay. Suppose you, your parents, and your grandmother go to an evening showing of Curious George. By checking IDs, the theater separates your family into three distinct groups: students, adults, and seniors. Since students and seniors are typically willing to pay less than adults, you and grandma get a discount and your parents pay the full price of admission. By charging several different prices, the movie theater attracts more moviegoers and captures more revenue.

Movie theaters also use variable pricing to account for peaks and lulls in demand for tickets. Willing to see a mid-day matinee? You'll pay less than the horde of evening moviegoers. As competition heats up in the market for cinema, movie theaters find new ways to implement variable pricing. In a recent New York Times article, David Leonhardt describes some subtle pricing tactics the theaters use to sustain revenues in the face of competition from the proliferation of entertainment substitutes like TiVo and Netflix.

1. How does National Amusements use variable pricing to separate its high willingness to pay customers from its low willingness to pay customers?

2. Individual theaters do not yet charge different admissions for different recent releases. Leonhardt suggests that variable admission prices might send moviegoers the wrong message: lower-priced movies are duds.

Suppose Mega-Super-Cineplex charges $9 for Final Destination 3 and $12 for Curious George. By setting a lower price for Final Destination 3, might the theater actually influence consumer tastes and shift the demand curve for tickets? Or would this strategy simply reduce the wait (quantity demanded) for Curious George tickets and fill vacant seats (increase quantity demanded) in showings of Final Destination 3?

3. Other kinds of firms also use variable pricing. American Airlines was the first airline to use a yield management system to implement variable pricing. How did American Airlines first separate business travelers from leisure travelers?

4. According to the article, why did Coca-Cola's variable pricing strategy backfire? Suppose theaters adopt a similar strategy by charging more for Friday and Saturday night shows than for weeknight shows. Might the value moviegoers place on fairness exceed the costs they incur by waiting in line at a crowded theater?

Interested in movie pricing? George Mason University economist Tyler Cowen offers several explanations of flat movie pricing on his popular blog, Marginal Revolution.

Topics: Price discrimination, Variable pricing, Consumer perceptions of fair pricing


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