The new "Mission: Impossible" film has made ten times more money than smaller films like "Young Adult." If greater demand is supposed to move prices, why does a ticket to each movie cost the same?
Tom Cruise/Mission: Impossible
At the AMC Loews in Georgetown, Washington, D.C., every evening ticket is $12, plus taxes, whether you want to see Mission: Impossible - Ghost Protocol, the holiday-season juggernaut starring Tom Cruise bouncing off Dubai's 2,700-foot Burj Khalifa tower, or Young Adult, a small, dark comedy starring Charlize Theron.
Like tens of millions of Americans, I have paid money to see Mission: Impossible, which made $130 million in the last two weeks, and I have not paid any money to see Young Adult, which has made less than $10 million over the same span. Nobody is surprised or impressed by the discrepancy. The real question is: If demand is supposed to move prices, why isn't seeing Young Adult much cheaper than seeing Mission: Impossible?
Senior rates and matinee discounts exist, but movie theaters don't offer different prices for different films showing at the same time. "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," Barak Y. Orbach and Liran Einav begin in their research paper that looks at pricing strategies for movie theaters. This practice -- known, wonkily, as uniform pricing -- isn't specific to movies. It's true for sports, where I pay the same price for a football ticket whether the Redskins are playing the New England Patriots or the St. Louis Rams. It's also true for music. The fact that Katy Perry is likely to outsell Gilbert & Sullivan this year doesn't make "Last Friday Night" any cheaper than "I Am the Very Model of a Modern Major General."
But it's something of a mystery to Orbach and Einav that studios and theaters, so notoriously canny about finding profits, never experiment with higher prices to capture more money from inevitable blockbusters -- or with lower prices to fill up empty seats.
To make successful movies more expensive, you have to know what movies are going to be successful. That's not as hard as it sounds.
The Hollywood cliche is that "nobody knows anything" when it comes to how a movie will perform at the box office. But there are some basic rules of thumb. More expensive movies have bigger audiences. There is a high "correlation coefficient" between production costs and gross revenues. Sequels outperform non-sequels. The seven best-performing movies of 2011 were second, fifth or eight in a franchise. Christmastime outsells Eastertime ... and every other time, as the graph of weekly attendance below shows. Furthermore, it's practically a rule of law that big opening weekends predict overall success and that movie revenues fall after the first week.
One-price-tickets is a kind of return to the earliest days of (barely) moving pictures, when everybody would put a penny in a peep show machine. But the first instances of what film archeologists would actually call "movies" around 1910 featured different prices for different films. Movies were priced according to their length, stars, and popularity. For three decades until the 1940s, one theater would have the rights to each movie within a certain zone, and movies received grades (A, B, or C) that corresponded with ticket prices at those theaters. If the rules of the 1920s ruled today, Mission Impossible might be $15 and Young Adult might be $7. What changed?
Everything. For starters, the famous Paramount anti-trust case broke up monopolies between producers and distributors. Multiplexes replaced single-serving theaters. A recession after World War II coincided with the popularity of television to gut studio revenue, forcing them to rely on fewer, more expensive movies.
Over time, the system moved toward one price for all films. As Steven Pearlstein explains:
If you have any doubt that the studios have the power to dictate uniform retail prices, consider what happened with the introduction of "The Godfather" in 1972. Up to that point, the tradition was that theaters could charge a premium for tickets to the handful of "event" movies that came out every year -- in the modern context, the "Harry Potter" and "Spider-Man" movies. But when "The Godfather" was released in 1972, suddenly every movie theater in the country eliminated its event-movie pricing. That's the kind of "coincidence" Don Vito Corleone would have been proud of.
Forty years later, uniform pricing is uniform practice for movie theaters. And with the onslaught from online streaming, legal downloads, and DVDs, studios and theaters are nervous as heck about pissing off what die-hards they have left by moving prices based on demand. (Although, you could argue that charging more for a 3-D movie is an interesting exception.)
But Orbach and Einav find some evidence that where dynamic pricing was used, both the theaters and the studios benefited. In Japan, tickets for Jurassic Park were profitably sold for a premium of 67%, while tickets for Austin Powers were profitably sold at 45% discount for young audiences. That's a huge boost for studios, who keep an outsized share of a movie's opening weekend revenue. Meanwhile, in 1970, some D.C. theaters cut weekday tickets by two-thirds and saw popcorn sales double. That's a huge boost for theaters, since half of theaters' income comes from amenities like popcorn.
So how come we're still stuck with $12 tickets for both blockbusters and indie flicks? A few theories:
1) Theaters do price discriminate already, kind of, but they do it with space. At the multiplex, not all theaters are alike. Bigger movies get more theaters with better technology. Smaller movies get older theaters with smaller screens.
2) You can't consistently cut prices after a successful opening weekend. If people knew that ticket prices would fall after a big opening, many more would wait until the second or third weekend to see it, which would, ironically, destroy the meaning of opening weekends.
3) Price can repel as easily as it attracts, because it's a signal of quality. If you're a theater showing one movie for $6, one movie for $10, and another for $12, perhaps fewer people will see the $6 movie because they assume it's garbage.
4) Cheaper tickets lead to higher policing costs. I'm a cheapskate, so I might buy a ticket to see cheap, cheap Iron Lady and sneak into Sherlock Holmes. This would create a fascinating incentive for art-house studios to release smaller, cheaper films the same weekend as blockbusters, knowing that thousands of canny consumers might buy fake tickets to their show to sneak into the more expensive blockbuster.
5) Price discrimination offers more opportunities for other movie theaters to steal each others' audience. Once again, I'm very cheap, so I don't mind taking the metro way across town to see Sherlock Holmes for significantly less money if one multiplex starts to mark up its blockbusters.
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