Sunday, 19 November 2017

Regal Cinemas to introduce dynamic pricing for movies

I've written a couple of times before about pricing at movie theatres (see here and here). On the surface, movie theatre pricing seems to defy basic economic theory. The price of movies doesn't differ between high-demand movies (where we would expect higher prices) and low-demand movies (where we would expect lower prices).

Although, as I wrote in both those earlier posts there probably is some element of this dynamic (or variable) pricing, it just isn't obvious. It is hidden by the choices the movie theatre makes, about which movies are "no complementaries" and the size and configuration of the theatre in which each movie plays (where some have a greater proportion of premium seating). These choices allow movie theatres to ensure that the average movie ticket price differs between high-demand and low-demand movies.

Now, Regal Cinemas in the U.S. is about to make the variable pricing more obvious, as Bloomberg reported last month:
Regal Entertainment Group is testing demand-based pricing for films, potentially leading to higher prices for top hits and low prices for flops, a big change for an industry that typically uses a one-size-fits-all approach.
Working with app maker Atom Tickets LLC, which has lobbied theaters to try dynamic pricing, Regal plans to test the concept in early 2018 and see if it boosts revenue and fills more seats at non-peak times...
Industry executives are debating whether dynamic pricing will increase attendance. Some object to a system that would involve charging higher prices for hit movies and lower prices for unpopular movies.
In that last paragraph, it might seem obvious that dynamic pricing will increase attendance for the low-demand movies. However, it isn't at all clear whether it will be offset by lower attendance at high-demand movies (because these consumers could go to a cheaper low-demand movie instead, and some of them may choose to do so). Total attendance is of course made up of the higher attendance at low-demand movies that will now be cheaper, and possibly somewhat lower attendance at high-demand movies that will now be relatively more expensive (even if the price remains the same as before). Industry executives shouldn't be focusing on the effect on attendance though. Instead they should be looking at total revenue. In this case, the effect on total revenue could be negative, since more tickets at a lower price might not offset fewer tickets at the original price (although that seems unlikely, since the high-demand movies tend to also have fairly inelastic demand, since they have few substitutes). That potential for lower revenue would be grounds for objection from the executives, and I guess we will see in due course whether Regal Cinemas benefits from this change - they movie consumer almost certainly will.

[Update]: David Sims in the Atlantic points out the negatives of Regal's dynamic pricing approach.

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