The movie theaters this summer have faced declining
revenues. There is no shortage of blame
to go around, from the low quality of movies to the weather, but I blame
business people who own theaters for thinking like economists.
Ever since movie theaters started clustering ten and twenty theaters into one building and putting high-operating-cost single-movie-theaters out of business, the multiplex theaters have been steadily raising their prices.
The economist in them is saying, ‘Keep raising prices until the revenues flatten out.’ So long as a 10% price rise drives away only 9% of the people you can still raise prices.
There is another economic idea that has a greater bearing on
this situation. Cross price
elasticity/substitution. As prices rise
for movies, consumers find other things that are equally satisfying to spend
their money on. Such as DVDs, games and
watching Tivo on a home recreation console.
Then there is a law of marketing that comes into play and has nothing to do with economic theory: once people change their habits, they don’t usually change back.
Meaning that movie theaters can’t lower their prices and expect audiences to return. The theater owners are in a boat in a riptide without a paddle.