The unique economics of entertainment

Nicholas Tabarrok points out that the movie business is unique in that the cost of producing movies does not affect the price customers pay to see a movie:

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.

It’s an interesting observation I’ve never really thought about. The movie business is probably the most extreme example, but as a commenter points out, the music business is similar, and console games aren’t all that different, either. Most cost about the same amount when they are initially released.

3 thoughts on “The unique economics of entertainment

  1. It’s interesting to think about Joel’s article in light of the Amazon MP3 store pricing model, which has prices that vary for all sorts of reasons, and runs various kinds of specials all the time. I don’t think it’s working quite as he predicted, but that could in most part be due to the fact that Amazon’s market share is not very large.

  2. Some of these arguments espousing the magical power of signaling seem to border on a religious reverence. If signaling had such power, why doesn’t every other system in which consumers are given a choice follow a one-price model? I find it hard to believe that no one ever orders the slightly less expensive dishes at fancy restaurants due to the perception that its price indicates its shittiness. Signaling is clearly “a” factor, but not “the” factor in how consumers decide on options. As other consumer-useful information disappears, i can imagine that signaling will move up in importance when making choices, but the movie industry is in no where near a situation where signaling is the only thing that consumers have to go on.

    I think that the movie pricing scheme is simply a historical artifact of a time when economic information (as well as other information) were distinctly less motile than now. It was easier to just set fixed rates and treat them as a cover charge for an evening’s entertainment. That legacy has carried on since then mostly as a tradition with a little bit of, perhaps inadvertent, practicality (given the culture of people watching movies other than the one they nominally paid for). If we’re lucky, maybe someone will break from the movie cartel and mold pricing towards offering better consumer choice, but I think we’ll have to see the theater industry basically on the verge of death (and the movie industry caring enough to change their terms of service).

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