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Comments

Adam

the fact that prices don't vary too much is strong evidence that quality doesn't vary much either.

How do you explain that some movies do very well at the box office, while others flop? Doesn't this suggest that there are huge differences in the total demand for different movies?

TM

You pay a small fee to engage in an otherwise pleasant experience - sit comfortably, somewhat deprived of outside stimulation, generally free of spouses, kids, bosses, and eat some popcorn.

Although I occasionally go to movies alone, my wife normally likes to accompany me. Even if I agreed with you as to whether that subtracts from the value of the experience, I would never have the courage to post it.

More broadly, lots of "bad" movies are still fun as a shared experience - you can ridicule it afterwards with friends, and that is always a delight.

That said, I did have about a six month stretch where, no matter what movie I was watching, I would find myself thinking that I could have stayed home and rented "LA Confidential".

Dave Tufte

I don't find anything particularly new in Adam's comment. He's right - lots of movies are hits and lots are flops. And yet, that usually reflects differences in demand. What he is outlining is a shift of demand back and forth. What I am outlining is why supply is flat - so that those shifts back and forth translate mostly into changes in quantity of tickets sold, and very little into the price charged for tickets.

Dave Tufte

I like TM's point so much there will be a post coming out about it on March 16.

Kyle

Very interesting analysis. As much sense as the theories make, after I read it I still feel like I'm at square one. The glaring question in my view is why theater managers do not try to maximize the potential profit.

During much of the week (Sun-Thurs) in my area, one can go to the movies and be the only person in the theater for a 9pm show. And whether I want to go see "Gigli" or a 3 hours long "Lord of the Rings", it's the same price...Lord of the Rings was worth $10 to see, but from what I heard (and most everyone heard), Gigli was not. I would imagine that curiosity could induce people to see something like Gigli (or if theres nothing much else to see for $10) and they might say, "sure, I'll pay $4 to go see Gigli." There is also then potential for a positive word of mouth to spread to like-minded people who were otherwise dissauded by the negative reviews. Instead, theaters run terrible movies for weeks with extremely low and sometimes non-existent attendance and insist upon a $10 fee.

If I were manager of such a business, I do not see why I would abide such foolishness.

The similarity that you draw between the pricing scheme of renting movies and the watching of them in theaters is well taken, but in practice I again see a large difference. In a theater, the cost for a couple to see a movie with a soda is about $25. That can be a substantial chunk of one's income for many people. It's just a couple bucks to rent any movie you want and have any array of food and drink while in the comfort of one's favorite chair. There is a certain element of investment. So often people say, "I'll just wait until it's out on video." This is because of the reltively high cost vs benefit of particular movies. The relative cost of renting a movie is so low that it would not matter much if it was $3 to rent LOTR and just $1 to rent Gigli.

What do you think?

Dave Tufte

I think this all makes sense (up to a point).

For my part, I'm not willing to assume that how theatre managers price their wares is not profit maximizing, as you do. I'm much more comfortable thinking of them as profit maximizers, and then assuming that they are seeing something that I don't.

The behavior of managers suggests that movie tickets are very inelastic with respect to quality, so that lowering prices also lowers revenue. To me, that says that this strategy is being driven by the insensitivity of demand to quality. I offered up one explanation of why that might be the case (and Marginal Revolution had a bunch more).

That covers some of what you said. As for the other parts, I'm not sure that word-of-mouth would benefit a theatre manager. How do they capture the benefits of that when they don't have a monopoly on a particular film? I think your point about renting is absolutely correct, but there are two levels of decision: renting vs. going to the theatre, and why you'll pay the same amount for a movie whether it is good or bad (as long as the venue is the same). I only addressed the latter, so I'll just agree with you on the former.

However, I do think that you've got to be getting something different between seeing a first run movie for $10-15 a person, and a DVD for $3-5. What could that be? The joy of going to a dark room where people talk to much? I doubt it. The joy of seeing the moving before eveyrone else? Possibly, but those people would be analogous to early adopters, and there don't seem to be too many of those around. That leaves the joy of comeradery (did I spell that correctly??) at seeing something at essentially the same time that others see it - so that the market is thick with commentary and understanding about that particular movie. I'm not sure if this is it or not, but everyone had a lot of fun saying "Hasta la vista, baby" in 1991, and that had to be worth something to them.

Ontario Highway Traffic Act

"A call option is a security whose purchase gives you the right (but not the obligation) to purchase a second security at a fixed price in the future. Options are an old form of financial instrument, but over the past 20 years or so, financial researchers have recognized that the methodology they use for understanding (say) an option to buy GM stock is applicable to a wide variety of other forms of human behavior (this field is called real options)."

Wow the relation to this and the market and movie tickets is amazing...this is good research!

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