Theaters, Asymmetrical Information, and Star Wars 7 (Part I)

These days, Star Wars rumors are plastered all over the Internet. It’s hard to go far without running into a new rumor about the plot of the upcoming trilogy, or JJ Abrams standing in front of a puppet-alien, claiming that he’ll use no CGI in order to bring Star Wars back to its roots. The question is: why does JJ Abrams bother with all of these strange ‘leaks’? It could be that entertainment news sites have nothing else to talk about, but that theory seems discredited by the astonishing proliferation of celebrities-eating-a-cupcake articles. However, this phenomenon is different, and that has to do with how movies function in the theaters: a process that hasn’t changed in about 40 years.

It’s well known that most big mainstream movies make the majority of their money in theater showings. This makes sense, since it costs very little for studios to send reels to theaters and those studios get some amount of the revenue generated from ticket sales at the theater. The cost of manufacturing a reel is extraordinarily low per-viewer when compared to DVD distribution, and the studios can generate a great volume of sales at the lower prices for tickets. There are two important irregularities in the theater industry; the first is that, between movies, prices do not vary. The lack of variable pricing between showings is an odd phenomenon in the theater business, because movies have a huge range in popularity, with some films having lines of attendees who stand outside the theater for days in advance of the showing, and other movies having only one or two audience members. It can be imagined that more people would, using current box office standings, go see ‘The Hundred Foot Journey’ over the ‘Equalizer’ if the former was to some extent cheaper than the latter. In addition, there is a significant drop in theater attendance during the week. In spite of this predictable change in demand, theaters do not change the price they charge for screenings depending on when they occur. Lowering prices for some movies during the week could potentially boost ticket sales during that time period, and possibly could increase demand.

There are 2 common issues brought up by studios and theaters arguing in favor of constant prices, the first being an issue of enforcement. In order to make sure that people who bought tickets to cheaper, less popular movies don’t sneak into the more expensive shows, there would have to be extra employees hired to stop potential ne’er-do-wells from entering the pricier shows. Hiring extra employees to guard the entrances to popular showings would cost the theater valuable profit, and might reduce profitability overall if they are not able to adequately enforce who goes to which showing. There is some reason to this, but it doesn’t explain why theaters don’t vary their pricing throughout the week. The second reason is that studios and theaters don’t want to have customers think that the cheaper movie is worse than another movie that is full price. This is a reasonable concern to have, since customers do behave this way on occasion, as was argued by Stephen Levitt in his excellent blog post about the nature of wine connoisseurs here. This claim however, makes a very interesting observation regarding what kind of information the consumer has. If this were true, then this would imply that the consumer does not know the quality of a movie they are about to spend upwards of 13 dollars to see. This is a pretty big issue, since lack of information about a product can be a big problem for markets in the long run. Next week, I will get to how this information deficit affects the behavior of studios and their marketing behavior, and why this causes Star Wars 7 ‘leaks’ to appear all over your Facebook news feed.

For a in depth discussion of the economics of ticket prices over time, planet money on NPR published this radio piece.

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