South-Westerns' Economic News Summaries
Should we see King Kong for $8, or The Ring 2 for $4?
Subject movie theaters experiment with price discrimination
Topic Monopolistic Competition, Monopoly, Supply and Demand
Key Words Price discrimination, movies, theater chains.

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Reference ID: A142075220
News Story

Fly on an airplane, and you can bet that you didn't pay the same airfare as the person sitting next to you. Go to a restaurant before 5:30, and pay an "early bird" reduced dinner price for the exact same meal that someone else will pay triple that price for at 7:30. Why shouldn't the same pricing strategy apply to moviegoers?

Soon it will. Movie theater chains like National Amusements face stiff competition from satellite television systems, DVD rentals and sales, TIVO, and cable television services. In response to these threats to their economic survival, movie theaters are moving toward "variable pricing"--a strategy that other industries have employed profitably for years.

Firms have tinkered with variable pricing (also known as price discrimination) over time; you may recall the furor that erupted when Coca-Cola announced that it was thinking of installing thermometers in its vending machines, and charging more for a soda on hot days. Such pricing makes perfect sense, unless you really want a cold Coke in the middle of August. Airlines use price discrimination when they charge different prices for travel during the week (business travelers) vs. travel that includes a Friday or Saturday night stay at the travel destination.

Movie theater chains used to face competition on the basis of which movies were shown, not on the ticket price. In the face of stiffer price competition, though, theater chains are being forced to revamp the system. National Amusements is experimenting with a pricing structure that offers reduced prices during the week than during the weekend; reserved seats in the middle of the theater for a few dollars more; wider seats may be more comfortable, but also more expensive. What may be a harder sell is charging different prices on different movies. Such pricing changes would be far more subjective, and much more difficult for the consumer to stomach. But, at the same time, if movies are like art--and people like to think that they are--then there should be different prices for different movies. Not all works of art are worth the same…

Questions
1.

Variable pricing plays on the theory of elasticity of demand. Under this pricing strategy, how do prices vary with elasticity of demand?

2. What should happen to producer surplus of movie theaters under this plan, as well as consumer surplus? Why?
3. Should movies themselves be priced differently; that is, should King Kong have a different ticket price than Harry Potter? Why or why not?
Source David Leonhardt. "Changes ahead for a theater near you." The New York Times15 February 2006. http://www.nytimes.com
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