Tyler Cowen quotes Ashok Rao,
Is the fact that I’m browsing on iTunes at all enough of an information signal to segregate the market?
I believe that this is the answer. If you go to a movie theater nowadays, that is as good as putting a sign on your forehead saying, “I have inelastic demand.” In a world where price discrimination explains everything, you can expect movie ticket pricing to err on the high side.
On the question of why there is not a price differential for higher quality movies, I have the following thoughts:
1. The best analysis of the economics of movies can be found in The Big Picture, by Edward J. Epstein. Pretty much everything I know about the topic I learned from reading that book.
2. One thing I took away from Epstein is that a lot the revenue that goes to the industry comes from tie-in sales (think Star Wars toys) and popcorn sales. The movie per se has more limited revenue potential.
3. Should better movies cost more because they are more expensive to make? Actually, the relationship between the amount spent making a movie and the quality of the movie is not terribly strong.
4. If you think that it should be the cost of distribution that drives the cost of movie tickets, then, well, the cost of showing a good movie is no higher than the cost of showing a bad movie.
5. From the theater’s point of view, it is perfectly rational not to charge a premium for good movies. The theater does better to increase popcorn sales by raising the quantity instead of trying to increase revenue per ticket by raising the price.
6. From the theater’s point of view, it is perfectly rational not to offer discount tickets for bad movies. Because the biggest cost of seeing a movie is opportunity cost, cutting the price is not going to induce many people to watch a movie they don’t want to see. Would you waste the time to go to a theater and watch a movie just because it was half price?
Books aren’t priced by quality either, are they? Or music CDs. Or board games.
Doesn’t any explanation about movies have to also explain these others?
I think it does. While you can add screens to Star Wars and put Grownups 2 in a smaller theater (oh wait, those crappy movies make money…you get the point), there really isn’t a good supply and demand curve for these things.
The analogy for books and CDs is that the initial print run needs to be sold. Also, as has been said elsewhere, you don’t know if you are going to like it before you buy it, so a cut rate price might signal poor quality and make people not buy.
Another question is what makes theater seats different from airplane seats. One possible answer is that your movie-going experience goes down quickly as seats are filled, but since airplane seats are already pretty full they have greater incentive to sell out and indeed oversell.
Except that genre ebooks do sell for low prices (and in large quantities) on Amazon and elsewhere. There is no initial print run to worry about.
On streaming services such as Amazon Prime, there is a price differential for newer movies in that you cannot rent them for (say) $3, like you can with older movies. You must buy them for the full $15 or $20.
Who is going to charge less for a blockbuster because everyone wants to see it? (Near zero marginal cost after all.) If acclaimed pictures charge more, how many will want to see them? (Acclaim and audience have low correlation.) Quantity adjustments, screens, showings, weeks, are much easier to make than pricing.
I suspect that 3D, IMAX etc. are in part attempts at price discrimination.
Again, the question is why not just change prices. It’s not like it would be harder for movies than it is for other things where prices change constantly. And yet they don’t, so there must be reasons, even if they are just custom.
The first problem is with the question is the idea that there is such a thing as an objectively measurable movie ‘quality’. Think instead of niches. There are people who love movies with sports cars, bikini babes, superheros, and plenty of explosions. Others love sparkly vampires. You’d have to pay to sit through most of those. But it doesn’t matter, as long as the there are enough devotees of a particular kind of ‘bad’ movie to make it profitable. But for any kind of niche, the last thing you want to do is reduce the prices to the lovers of that type of movie just because theirs is a minority taste.
Tyler Cowen has trouble grokking this because he’s an aesthete who’s committed to the idea, for example, that there’s a single correct answer to questions like ‘What’s the best Peruvian restaurant in Northern Virginia?’.
‘What’s the best Peruvian restaurant in Northern Virginia?’.
Surprised he hasn’t answered yet…
Also, nobody sets out to make a bad movie. And the studios don’t know whether it’s a good or bad movie until the release and the first couple weeks.
Look at Deadpool. Now they are going to release an R-rated version of Batman v Superman because of the surprise of Deadpool. I think that is crazy. I had a 5 year run when I could take my kids to Superhero movies and now it is over.
Amazon Prime has different prices for movie rentals depending on quality. Prime movies which are free to prime members tend to be low quality. There is a “free with ads” category now too. Rental rates range from $0.99 (e.g. Ricki and the Flash) to $5.99 (e.g. Room) and seem to me to be pretty well correlated with quality and popularity.
The demand for quality movies exists just like the demand for quality cars exists. But we try and pretend that movies, books and music are private goods… but in reality they are public goods. Treating public goods like private goods will always have detrimental consequences.
The solution is to create a sector for anything that can be digitized. Everybody would have to spend say 75% of their income in the digital sector. Then we could all freely share all our movies, books and music with each other. Sharing would be caring.
Nonetheless, dollar movie theaters exist
But why are all the movies a dollar?!
They’re not always. Nor are they all the same price at the normal theaters (time of day, 3D, IMAX, permit discounts for some movies some don’t, weekend marathons…)
So a) price discrimination between chains exist, b) price discrimination within a theater exists. But for the purposes of this discussion those forms of price discrimination apparently don’t count.
“permit discounts for some movies some don’t”
+1 First time I’ve seen someone mention this and I think it’s a big miss to the discussion. Theatres in my neck of the woods do not accept discounted passes (passes sold at discounts through Costco, employers, etc.) on some movies for a certain amount of time (usually popular new releases) — and that is one way to effectively charge a premium for better movies (measured by the demand it drives).
Your point #4 is incorrect. Theaters pay higher rental rates on big movies.