My colleague James Schummer was kind enough to point me to the following news item, which quotes George Lucas as predicting that one day a cinema ticket will cost $150. Mr. Lucas and (and Mr. Spielberg) believe that the movie industry will, over time, concentrate on big budget productions and these will cost more to see in the cinema. Indeed, one senior equity analyst at Morningstar is quoted as saying:
differentiated pricing according to the movie’s budget makes economic sense.
I think this is the sentence that caught my colleague’s eye.
He and I teach a class on pricing. In it we emphasize the simple point that fixed costs are irrelevant for deciding the price. If I could repeat this FACT in large friendly letters like the warning on the Hitchiker’s Guide to the Galaxy, I would. So, the idea that a movie’s budget should determine its price is not merely wrong but risible.
The Leisure of the Theory Class 
4 comments
June 15, 2013 at 3:04 pm
ed
So, do you have a model that explains why all the movies playing at a given theater are (to a large degree) priced the same?
June 15, 2013 at 4:50 pm
rvohra
Dear Ed
By focusing on the ticket price, you frame the issue too narrowly as the cinema is but one of many ways to distribute a movie. When one thinks about movie pricing in general rather than just at cinema, not all movies are priced the same. Some movies are released straight to dvd or on-demand. Others open in cinemas and have a short run before being distributed via on-demand or dvd. In this second case, even though the ticket price might have been the same for both movies, the fact that one goes to dvd earlier than the other effectively means they were offered at different prices.
Now to the exact question you posed. A movie is an experience good. Its quality can only be ascertained by experiencing it (or by the reviews of others with similar tastes). Furthermore, it is a good whose consumption can be postponed at little penalty. If movies were offered at different prices at opening, viewers would make quality inferences about the movie. One would skip the low priced offering on the grounds that it isn’t so great and wait for it to show up on-line, on dvd or TV. The movie sellers are better off pooling using the same price. The low quality movie gets the benefit of some sales at the high price on opening night and once its low quality becomes common knowledge, discounting it and distributing it through other channels.
rakesh
June 18, 2013 at 12:00 pm
A Reader
Rakesh, your signaling story here is wonderful: what models convey that flavor to explain uniform pricing?
In many theaters, one constraint to pricing different films differently is that it would be too easy to buy tickets for one movie and go to another. This is why they often check tickets again at the doors of IMAX screenings.
June 24, 2013 at 9:52 pm
rvohra
Thank you. The simplest model I can think of is where neither producer or movie go know the quality for certain. If everyone believes the movie is high quality with probability p and low quality otherwise, then every producer would charge a price consistent with the expected quality. Perhaps a more sophisticated model might be Milgrom & Roberts in the 1986 JPE.