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The Economics of Movie Prices

Indie film producer Nicholas Tabarrok writes:

One interesting thing that I've always found about the film business from an economic point of view is that unlike in any other business I can think of, the cost of manufacturing the product has no affect on the purchase cost to the consumer. For example Honda can make a cheaper car with less features and cheaper finishes than BMW without losing all of their customers to the superior car because they sell their product for less. You spend less to make something, you charge less for it. Makes complete and obvious sense.

Not so in the film business. I am an independent film producer and I make films that typically cost somewhere between $5M and $10M. But when I make, say, an $8M film it has to compete at the same price level as the studios' $80M or $100M film. It costs the consumer the same $12 at the multiplex (and whatever it costs to rent a DVD from Blockbuster these days) for either film. There is no price advantage to the consumer for choosing to see a less expensive film. This naturally makes it terribly difficult for smaller films to find an audience. I find this quite fascinating and I can't readily think of another industry like it.

Other entertainment industries -- television, music, and books, for instance -- seem to work much the same way. A hardcover screed against George W. Bush costs much the same as a hardcover book that entailed three years of traveling through the Amazon. An orchestra's album costs the same as an underground hip-hop effort. Presumably, this is characteristic of industries that are producing different types of information but encoding it on the same raw materials. But Tabarrok is right that it's a bit odd, though it's actually least odd in the film industry, where the underlying number of screens is fixed (as opposed to, say, the number of compact discs on the market).

By Ezra Klein  |  October 8, 2009; 11:40 AM ET
Categories:  Movies  
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Comments

It costs the exhibiting theater the same amount to show a film, regardless of its production cost: the theater's rent stays the same, its personnel costs stay the same, its taxes stay the same.

Tabarrok seems to omit such non-self-related factors from his calculation -- he thinks only about himself, in an Obama "I" factor style. Whatever happened to sharing... both burdens and profits?

Posted by: rmgregory | October 8, 2009 11:52 AM | Report abuse

As the industry moves away from physical media and towards digital media, I have a feeling that the content pricese will become significantly more flexible. Just look at the iTunes Store's new pricing structure. Although this price structure is based on number of down loads versus the negative cost of the feature, you would assume some strong correlation.

Posted by: brooklynpsu | October 8, 2009 11:53 AM | Report abuse

I am not an expert on distribution of a movie, but it seems to me Mr. Tabarrok has his customer confused. As a producer his customer is the studio/distributor not the end consumer. Most cost for the actual theater are fixed and I think the rarely directly pay a producer for the right to show a film

Posted by: jcmace | October 8, 2009 11:57 AM | Report abuse

Pricing is somewhat flexible, our local theatre has a 5 buck club, where you can see movies that have been out for 2 weeks for $5 rather than pay full price for the Premier weekend.

Posted by: ChicagoIndependant | October 8, 2009 11:59 AM | Report abuse

And, by the way, if you're in DC, VA, or MD, movie prices include an admissions tax of about 10% to 15%. Typically, the state and city together earn more from a film or concert than does the producer of the film or concert.

The MD rates are found at URL http://business.marylandtaxes.com/filinginfo/admissions/A&A_Rate_chart.PDF In DC, it's a bit worse, where "the City takes ten percent of the GROSS".

Posted by: rmgregory | October 8, 2009 12:03 PM | Report abuse

*Other entertainment industries -- television, music, and books, for instance -- seem to work much the same way. *

Not music: seeing an small-market band will cost you $5-$10 at a local music venue, while seeing a stadium rock show will cost you a minimum of $50 and possibly $100 or more. Similar for seeing a play at a theater: the community theater group charges a nominal fee compared to the broadway performance.

The "consumer good" of the t-shirt, the DVD, the CD, or the book is mostly fixed. The price difference typically occurs in the performance: the relative demand for tickets for a musical or stage performance. For some reason we price films at theaters as "consumer goods" rather than as "performances."

Posted by: constans | October 8, 2009 12:04 PM | Report abuse

Yep Tabarrok is just wrong. DVDs have various price points. Books also have various price points, seldom do they sell for "cover price". Theatres have set limits. CDs were priced fixed, we know this.

Posted by: endaround | October 8, 2009 12:07 PM | Report abuse

It costs the exhibiting theater the same amount to show a film...

EXCEPT for the cost to the theater to purchase the rights to show that film. And those costs must be enormous, because there are still plenty of "dollar theaters" in the Midwest that show second-run movies for $1-2 at matinee and $3-$6 on weekend nights.

Posted by: tomveiltomveil | October 8, 2009 12:14 PM | Report abuse

Suppose your time is worth $60. Lowering the ticket price of a movie from $12 to $6 would lower your total costs from $72 to $66, but it would cut your expectations in half. Music on the other hand is freely available even legally and doesn't take much time. To some extent you are paying for the ability to say you own it.

Posted by: CraigMcGillivary1 | October 8, 2009 12:15 PM | Report abuse

This isn't necessarily the case for concerts. In Chicago, for example, you can see a great indie rock show for $10 or so at the and indie rock club like the Hideout or the Empty Bottle, although chances are you'll end up seeing a band that "no one's heard of." For a little bit more money, you can see a band more people have heard of at the Metro or the Vic or the Riviera, and for yet more money you can see a show by a band that everyone has heard of at the United Center.

Still, I guess these price differences still don't have much to do with expenses (though a U2 show obviously costs a lot more than some indie rock show). Rather, these prices reflect demand. Still, it's a bit more rational than movie or CD pricing.

Posted by: blah1 | October 8, 2009 12:23 PM | Report abuse

I am surprised at all the posts on this subject. People must be tiring of healthcare and food.

I am going to use this as an opportunity to plug "Zombieland". If you like zombie flicks, it is worth the price.

:-)

Posted by: scott1959 | October 8, 2009 12:33 PM | Report abuse

Um, this is obvious. Once the movie is created, the marginal cost of additional showing is essentially zero. The only constraints are related to capacity and scheduling. So these, along with demand conditions, are what determine prices. Just as in software development, live event tickets, etc etc.

Posted by: dcodea | October 8, 2009 12:35 PM | Report abuse

Software follows the same pricing model

Posted by: tomwittmann | October 8, 2009 12:52 PM | Report abuse

Tabarrok is confusing cost with demand. The car analogy doesn't hold, because the entertainment value of the movie to the viewer bears no consistent relationship to the cost of its production.

To put it another way, one might just as well ask why the indie movie producer doesn't charge a higher price, marketing his movie on the basis of its artistic quality to smaller audience of devotees, like luxury and sports car manufacturers do.

Basically, entertainment producers are marketing an unknown quantity (we don't know how good the movie/book/videogame is going to be) in an unreturnable fashion (you can't get that two hours of your life back). There's no way to develop reliable pricing based on inherent entertainment value, so the industry coalesces around a price that it thinks is the highest that moviegoers will be willing to take a chance on.

Posted by: tomtildrum | October 8, 2009 1:00 PM | Report abuse

The thing your independent producer neglects to mention is that he only needs to pull in 1/10th as many people to break even against an $80M film. If independent films that cost 1/10th as much to make charged less for admission, than they'd have to increase their audience to make money... not easy to do. If 1 million people pay $15 to see 'Transformers,' it's a bust - but if they all go see an indi film, that one's a hit.

Posted by: chasm3 | October 8, 2009 1:07 PM | Report abuse

Before video and DVD became ubiquitous, there were lots of discount theaters that showed second-run and cult films. I remember patronizing a lot of "dollar theaters" in the 1970s and 1980s - one of them was the old State Theater in Falls Church, now a rock music venue. Drive-ins were also cheaper, but they are pretty much gone.

Now with everything chain multiplexes, the deals and discounts seem to have disappeared. I suspect the ticket price is more a price for the cost of a night out than for the film itself.

Posted by: Virginia7 | October 8, 2009 1:40 PM | Report abuse

Even within the CD market, though, prices can vary, depending typically on the band/artist's label. For example, Fugazi has long held the value of their CDs at $10 and done their best to keep their shows to $6, whereas other albums can sell for as much as $18-20. And, of course, there are albums priced anywhere in between.

Also, one strategy labels will take from time to time is to price an album much lower - especially one that's an unknown product, but they think is really good - so that it will sell well, do well on the Billboard charts, etc. That way the labels actually earn more, as more people are purchasing the album.

Posted by: stphone | October 8, 2009 2:12 PM | Report abuse

The art market actually seems like a better example of the point he's trying to make.

Posted by: bean3 | October 8, 2009 2:35 PM | Report abuse

Not only do some theaters, especially art houses, indeed charge different prices for films that aren't first-run blockbusters (as pointed out above), and not only do different films cost different amounts for the theaters to rent (as also pointed out above), but big-budget films are also likely to be on more screens in more theaters compared to small-budget films, so even when the ticket prices for the two are the same there are a lot more tickets for sale for the big-budget films.

And, as long as I'm reiterating points commenters have already made it is of course true that books, DVDs, and even CDs often have very different prices - although in those cases (especially books, but to some extent also DVDs or some CDs) it's often the big-budget, high-volume productions that are heavily discounted, and not the smaller-budget, smaller-market items - in precisely the reverse of Ezra's proposition.

Posted by: WarrenTerra | October 8, 2009 3:21 PM | Report abuse

The ownder of one of the low cost airlines tried to do something like this in the UK - applying the airline ticket pricing model to cinemas. So if you booked your ticket early, especially for a film expected to have low demand, it would cost very little, but if you booked at the last minute or for a high demand film it would cost a lot more than average. The studios all refused to deal with him and he had to abandon the plan.

Posted by: GingerYellow | October 8, 2009 4:09 PM | Report abuse

duh - how about newspapers? they mostly cost the same and vary widely in content and number of locally produced stories.
your little hometown paper probably costs about what the Miami Herald does. and yet, back when it was good, the Herald was a whole world, in your hand. the hometown deal was a bunch of rewritten press releases and local ads.
sigh. so long newspapers.

Posted by: nancyjeanmail | October 8, 2009 4:13 PM | Report abuse

Applies to Video Games. Cost for new video game: $50-$70

Posted by: zosima | October 8, 2009 7:21 PM | Report abuse

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