Movie pricing

Since I've been going to more movies than usual of late, I've been thinking about that messed up model of economic behavior known as movie pricing. Recently the guys over at EconLog weighed in with a post on peak load pricing at theaters:

What I can't figure out, however, is why some businesses have peak load pricing, but don't get the peaks right. Movie theaters are the clearest example. Yes, they've got expensive evening shows and cheap matinees, and the crowds are bigger in the evenings. So far, so good.

However, as a constant movie-goer, it's obvious to me that weekend matinees are a lot more crowded than weekday evenings. If you want to stick with two simple prices, it seems more sensible to have peak pricing all day on Friday, Saturday, and Sunday, and discount pricing all day on Monday through Thursday. The only drawback is that this might shift weekend matinee viewers to weekend evening shows, so perhaps theaters really need three prices - weekend evening, weekend matinee, and weekday.

For those of you who aren't econ nerds, what movie theaters are doing is engaging in third-degree price discrimination -- charging different prices to different groups of people based on their price sensitivities. The basic thinking goes something like, "Folks who have the free time to go to movies in the middle of the afternoon likely have lots of other ways to spend a day, so we'll give them a discount to draw them into an activity they likely would skip if it were more expensive. Folks that go at night (especially weekend nights), though, likely aren't as flexible -- they work during the day, weekend nights are their only free nights, etc. -- so we'll charge them more.

I've always agreed with Bryan's basic point that while theaters do price discriminate, they don't get it right. From a profit maximizing point of view, I've always thought there should be a substantial premium on weekend night tickets. [Some of Bryan's commenters claim that since theaters make more $$$ off popcorn and drinks than tickets the true motivation is to get as many folks as possible into the theater. That is demonstrably false as a price of $1 or so would be much more effective at filling seats. Think about it, what's the last movie you saw where the theater was COMPLETELY filled?] Anyhow, ... Even though I think theaters mess up their attempts at price discriminating, it's still a better (in a Pareto sense) outcome than the "one price all the time" model. The more puzzling thing to me, though, is why theaters insist on a single-price model for all movies?

Yes, I know many places have "discount" theaters that show second-run movies for a couple of bucks (that's 3rd-degree discrimination based on whether you're willing to wait to see the movie, same idea behind the lag before the softcover version of a book comes out), but why not apply the same principle to less popular movies even at the first-run theater. Remember when I saw two movies on the same day? Think about it; that day I saw Clerks II (sort of a hit) and Wordplay (certainly a niche film) and I paid full price to see both. The theater was pretty full for Clerks so I could see how they might not have wanted to discount that ticket even if doing so would have drawn a few more viewers (probably not enough to make up for the price cut on existing sales), but a deep discount for Wordplay quite likely would have been a good move for the theater. Drawing in just a few price sensitive viewers would have more than made up for the revenue they'd have "lost" on all the tickets they would have sold at full price -- that'd be one; I was the ONLY person there. I don't see why some theaters don't try it.

Yes, it would require more policing by theaters. They'd have to station a ticket taker outside each theater instead of just one at the entry point. I have seen something similar once before though. I was visiting a friend in D.C. when Schindler's List was in the theaters. It was popular enough that individual shows were selling out and the theater had to guard against people buying a ticket for a "lesser" film and then going to see Schindler once they got inside. To combat this, they tore Schindler tickets at the door to that particular theater. [Full disclosure, we were there to see one of the lesser films.] Yes, this would add to operating costs, but I can't imagine that cost would outweigh the revenue they could gain from higher prices for the next blockbuster. Plus, under my scenario they'd also be gaining extra revenue from the less popular films as well. I just don't get it.

A logical extension of my argument would be that films should command a premium on opening weekend and then be steadily discounted over coming weeks. I can at least see a coherent reason theaters might want to save that tactic only for major blockbusters. It seems there is a lot of prestige (and signaling) associated with big opening weekends, so a studio would need to take care that its big movie wasn't labeled a "loser" because of a small opening weekend. Still, my plan focuses mainly on movies they know will not be hits. It just seems differential pricing would bring in a lot of additional revenue and add very little to costs. It doesn't take an economist to realize that would increase profits.

P.S. I just realized that music sales follow the same pattern as movies (time discounts, but generally a single price model), but hardcover book pricing sort of follows my suggested pattern. Hmm, I'll have to think more on this.