Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Friday, January 28, 2005

An Exercise in Supply, Demand, and Tied Goods

Ontario's major movie theatre chain has just lowered its ticket prices from $13.95 to $9.95 due to a drop in demand.

Blame the almighty DVD, the splashy home theatre and the comfy armchair in your family room. All those factors were cited yesterday for a stealthy [sic] drop in attendance at movie theatres that prompted Famous Players Inc., the country's largest exhibitor, to chop $4 off its ticket prices in Ontario.
Right. If demand drops, then the profit-maximizing price drops, too, if the firm is anything but a price-taker. One might reasonably expect total revenues to decline, too.

But that is not what is going on here. Quoting Robb Chase, President of Famous Players,

"Box office is up, prices are up, but attendance is what drives the health of the theatre business"
This puzzled me for about 3 seconds. I'm guessing that by "box office" he means "revenue from ticket sales". And as every economics student ought to know, if total revenues increase when the price rises, ceteris paribus, then the firm is pricing its product in the inelastic portion of the demand curve, where marginal revenue is negative.
  1. Does this make sense?
  2. And if MR is negative, shouldn't a profit-maximizer raise its prices some more instead of lowering them?

1. Yes.

2. No.

Movie theatres earn very large mark-ups on concessions, and they cannot do that if they don't have many people there:

Since 2002, North American box-office revenues have been generally robust, thanks to ever-inflating ticket prices. But admissions have declined in the United States and Canada -- a disturbing trend for movie chains, since the majority of their butter comes from high-margin popcorn and pop sales.

Minor league sports franchises do the same thing -- set prices low, often giving away many tickets on various pretexts, and earn their money with concession sales.

For this pricing strategy to work, customers must be prohibited from engaging in arbitrage with the tied good (eco-speak for banning them from bringing their own snack with them), and it always amazes me that more people don't take their own Milk Duds to the theatre. It is easy enough for the management to stop people from bringing popcorn, and maybe soft drinks, to these events; but how do they police people who bring in their own packs of candy? And why do customers continue to pay these high prices for concessions?

I recall "smuggling" cans of pop into a theatre back when I was a grad student. I also recall deciding not to attend a given ball game when I was informed I wouldn't be able to take my pop and chips into the ballpark with me.

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