Although movies vary widely in appeal, quality, and cost, a multiplex in North America and most other markets charges the same ticket price for all non-3D movies it shows (during the same time period) and another price for all 3D movies. Both industry executives and academics researchers have suggested multiple reasons for the uniform pricing puzzle. However, minimal empirical work directly addresses this issue, likely because there is no observed price variation across different movie titles within a theater. In Hong Kong, however, prices vary both within and across multiplexes. Building a dataset consisting of ticket prices and daily ticket sales by theater and title, we study this pricing puzzle empirically. To estimate the effects of different pricing on demand, our structural demand model extends the well-known Principles of Differentiation model by nesting the original PD model under the choice of whether or not to see a movie. This allows for a fuller study of primary demand effects from pricing.
Among the various rationales advanced on the pricing puzzle (for example, consumers’ preference for uniform prices, the influence from the upstream channel members, and the costs of implementing differential pricing), a critical factor, rarely considered, is the effect of competition among movie theaters. This paper thus focuses on how uniform ticket prices can soften the competition, which would otherwise be intense under differential pricing. Specifically, we expect the differential ticket pricing would create two opposing effects. The first (demand) effect is the increase in profits due to the additional surplus the differential ticket prices can extract from consumers; the second (competitive) effect is the lower profits due to the competition intensified by each multiplex having a larger set of price alternatives. It is unclear a priori to what extent one effect dominates the other.
Based on the empirical results, which show that demand is sensitive to price after controlling for a variety of other effects, we conduct counterfactual simulations to compare the outcomes of differential and uniform pricing. Assuming that competing theaters are playing a Bertrand pricing game, we find movie theaters realize a higher profit (on average, because not all theaters are better off) when using a differential as compared to a uniform pricing strategy. However, the profit improvement is relatively small, consistent with the view that the competition-softening effect of uniform pricing dominates the surplus-extracting effect of differential pricing. The paper concludes with a discussion of managerial implications.