Thursday, January 21, 2010

Why Are Matinee Movies Cheaper?

Buy Ketchup in May and Fly at Noon: A Guide to the Best Time to Buy This, Do That and Go There
More from "Buy Ketchup in May":
Movie tickets are cheaper early in the day—between late morning and late afternoon—because theaters want to attract people who haven’t eaten lunch or dinner and will fill up on popcorn, candy, and soda. The amount of money these theatergoers save on matinee tickets pales in comparison to what they spend on food and drinks.
(Read all of my posts on this book here.)

The amount of money a movie theater makes from concessions is irrelevant. A theater doesn't need to make the same amount of money from hungry matinee moviegoers as it does from full evening moviegoers. The matinee prices are lower because it's better to have butts in the seats than have the theater empty during the day. A slim profit is better than no profit.

As a professor last semester discussed, it's helpful to think about whether fixed costs (what the firm has to pay regardless of how much is sold) or marginal costs (what the firm pays every time it sells something) are more relevant to a particular industry. For movie theaters in the afternoon, the vast majority of the costs are fixed; whether or not you show up, the theater will still have to pay the salaries of the ticket takers and concessions staff, the rent for the building, the electric bill, and everything else. Because theaters are almost never sold out during the daytime, it's in their interest to accept money from you and show the 11:15 a.m. screening to six people instead of five.

The only marginal cost of consequence (it also technically costs money to print your ticket, etc.) is the fee that the theater must pay the movie distributors. But once that cost is covered, anything else can help pay for the fixed costs or be reflected in the year-end profit. In other words, it's a win for the theater. For example, if a theater had to pay the distributor $3.75 every time someone saw a movie (I have no idea what the actual number is), then anything $3.76 or above is a profit, on the margin. Theaters can typically charge more than this because the market will bear it, especially in the evenings (also, it would take an awful lot of 1-cent ticket profits to pay for all the fixed costs).

A journal article titled "Spatial competition in retail markets: movie theaters" (JSTOR) gives a good overview of how movie theaters have to split ticket profits with distributors, while keeping concession profits for themselves. A similar mainstream discussion is here.

As for why snacks and food cost so much, it doesn't matter if the theater is already making a killing after you buy your ticket or if it's just scrapping by. Anytime there is only one place to buy food, you should expect monopoly pricing.

Incidentally, I saw a neat example of marginal analysis in the same spirit just a few days ago.

Disclaimer: The above analysis could be completely flawed, if matinee tickets are indeed a loss leader, meaning that the theaters have to pay the distributors more per ticket than they receive from customers, hoping to make up the difference and then some through pricey concessions. From my research, there doesn't seem to be any indication that this is the case.