Uniform prices for differentiated goods: The case of the movie-theater industry

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Abstract

Since the early 1970s, movie theaters in the United States have employed a pricing model of uniform prices for differentiated goods. At any given theater, one price is charged for all movies, seven days a week, 365 days a year. This pricing model is puzzling in light of the potential profitability of prices that vary with demand characteristics. Another unique aspect of the motion-picture industry is the legal regime that imposes certain constraints on vertical arrangements between distributors and retailers (exhibitors) and attempts to facilitate competitive bidding for films. We explore the justifications for uniform pricing in the industry and show their limitations. We conclude that exhibitors could increase profits by engaging in variable pricing and that they could do so more easily if the legal constraints on vertical arrangements are lifted.

Introduction

Since the early 1970s, at any given movie theater, one price has been charged for all movies, seven days a week, 365 days a year. Most theaters employ some form of price discrimination, such as discounts for seniors and students. But with the major exception of matinee rates, each moviegoer pays the same price for all movies at any time. This business model of uniform pricing for differentiated goods is puzzling, since one would expect to observe price differentiation across movies and across show times (Surowiecki, 2004, pp. 98–101). Several industry practitioners and scholars have argued that such variable pricing schemes would be “too complex [and] could cause confusion in the minds of consumers” (Litman, 1998, p. 45). This belief, however, is not supported by the industry's experience that for many decades engaged in sophisticated price discrimination and price differentiation practices (Orbach, 2004). This paper analyzes the possible reasons for the persistence of the uniform pricing regime in the motion-picture industry during the last three decades.

In addition to its peculiar pricing practices, the motion-picture industry is characterized by an idiosyncratic legal regime that imposed strict constraints on possible vertical arrangements between distributors and retailers (exhibitors). This regime was laid out by the Supreme Court in United States v. Paramount (1948)4 and the consent decrees that were issued pursuant to this decision. In Paramount, the Justice Department sought to break up a cartel of eight distributors that controlled the production, distribution, and exhibition of movies in the United States.5 These distributors engaged in price fixing of admission prices, allocated geographic areas of distribution, and engaged in a few other collusive practices. In an attempt to open the industry to competition, the Paramount court ordered the distributors to divorce their exhibition businesses and prohibited various forms of vertical arrangements between distributors and exhibitors. The three key prohibitions were: (i) a prohibition against expansion into the exhibition segment,6 (ii) a prohibition against intervention in box-office pricing,7 and (iii) a prohibition against any movie licensing negotiation, which is not in the form of theater-by-theater and movie-by-movie. Furthermore, in 1968, the Justice Department entered into consent decrees with the Paramount defendants to limit to three the number of films which they could blind bid per year.8 The decrees expired in 1975 and within a few years 24 states enacted anti-blind bidding statutes that banned any form of blind bidding.9 More than 50 years after the Paramount decision was handed down, its proscriptions, as well as the state anti-blind bidding legislation, are still in effect. The purpose of these restrictions was to foster competition and prevent market foreclosure through an attempt to maintain a competitive, informed spot market for movies. The Paramount Court, Justice Department, and state legislators seemed to believe that the adopted legal rules could facilitate competitive bidding for films. To the best of our knowledge, in no other industry are such legal constraints on the relations between distributors and retailers imposed, nor have ever been imposed.

To be sure, uniform pricing for differentiated goods is prevalent in many industries. There are no price differences among long-distance calls of the same carrier. At the grocery store, all Häagen-Dazs’ flavors carry an identical price tag. We pay the same price to see the Los Angeles Lakers and the Charlotte Bobcats when they come to town, although the Lakers’ games are often sold out and the Bobcats’ games almost never.10 In the same spirit, online music vendors price all songs uniformly.11 In many instances, there are solid economic explanations for uniform pricing (McMillan, 2005). Typically, transaction costs, such as information and menu costs, and direct regulatory constraints on pricing account for a significant portion of the phenomenon.12 These explanations and others do not apply to the movie-theater industry.

We study the practice of uniform-pricing in movie theaters and explore the existing justifications for its persistence. These justifications include concerns that variable pricing would enable exhibitors to misappropriate box-office revenues at the expense of the distributors, a double-marginalization problem, perceived fairness, uncertainty, and transaction costs. Orbach (2004) shows that, in the past, exhibitors profitably employed variable-pricing strategies, although all the primary justifications for uniform pricing had already existed. The two major differences between the era when exhibitors employed variable pricing and the present era are the rise of the multiplexes and the legal constraints on vertical arrangements between distributors and exhibitors. We explain why the rise of the multiplexes is less likely to explain the uniform-pricing regime and argue that the constraints on vertical arrangements may have played a role in the transition to uniform pricing and in the persistence of the practice.

The paper continues as follows. Section 2 presents the puzzle of uniform prices at the movie theater, studies the patterns of the demand for movies at the theater, and provides general guidelines for the incorporation of anticipated demand patterns into ticket-pricing policies. Section 3 surveys the history of movie pricing since the early days of the motion-picture industry until the current pricing regime, with a focus on the feasibility of profitable variable pricing. Section 4 explores the actual and alleged causes of the persistence of the uniform-pricing regime, and Section 5 concludes.

Section snippets

General characteristics of the puzzle

A movie theater offers a spectrum of products, each of which is defined by the movie and its show time. On this spectrum of differentiated products, the short product life cycle of movies and uncertainty regarding their general appeal make it difficult to estimate accurately demand elasticities. Nevertheless, exhibitors can distinguish among certain clusters of products for pricing purposes. For example, while many moviegoers may be nearly indifferent between watching a particular movie on

An historical perspective

This section summarizes the history of movie pricing and draws on Orbach (2004), who provides a detailed study of the history of pricing in the motion-picture industry. It is difficult to obtain reliable historical data on box-office pricing and the only data we could find was on national average box-office prices. Fig. 3 summarizes available data on per-capita attendance and average admission prices. We offer this information to illustrate the response of ticket pricing to various historical

Possible causes for uniform prices

Our inquiry into the possible causes for uniform admission fees at the movie theater is based on many interviews and conversations with industry practitioners and observers. Most of the popular explanations utilize soft arguments from behavioral economics and transaction-cost economics. Some explanations, although frequently used to explain the general practice of uniform pricing, apply only to the movie puzzle and, cannot explain the show-time puzzle. However, even less-persuasive arguments

Conclusion

In the motion-picture industry, ticket prices do not vary with known and identifiable patterns of demand. Due to the persistence of the practice of uniform pricing at the box office, it is impossible to estimate demand elasticities for movies. The suggestive evidence, however, indicates that optimal pricing would not be uniform.

A unique characteristic of the motion-picture industry is the legal constraints on the relationships between distributors and retailers (exhibitors). The Paramount

Acknowledgement

We thank three anonymous referees and Avery Katz, the editor, for many comments and suggestions that greatly improved the paper. For comments, conversations, and criticism of earlier drafts, we thank Yoram Barzel, Richard Caves, John Coates, Alex Cooke, Josh Gray, Andrew Hanssen, Christine Jolls, Louis Kaplow, Mike Lewkonia, Scott Masten, Manuel Trajtenberg, Mark Weinstein, and participants in the 2004 Annual Meetings of the American and Israeli Law and Economics Associations. The paper has

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