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Posted by on Nov 8, 2010 in Economy, India, TG Roundup, USA

Movie ticket prices: Regulation versus Free Markets

Those who are active on the Indian movie scene might have heard about the block-buster release of the south Indian movie Robo that came out recently. It was starred by the popular Tamil star Rajanikanth.

Vinoo is a good friend of mine. He usually watches Rajanikanth’s movie in the first week of the release, but this time he refused to do so. So, here’s Vinoo’s gripe. Indian movies played in the U.S. theaters typically cost around $9-12 per ticket. During the first week of Robo’s release, theaters were charging $18 – $20 per ticket. Vinoo was mighty upset that the theaters are abusing their ability to freely price the tickets. He bemoaned how he missed regulation in India, where government imposed a ceiling on movie ticket prices and how regulation protected common man from being taken for a ride by unfettered free markets. As usual I didn’t agree with him. Being a free markets champion, I believe in theaters charging as much as they want for the movie tickets- absolutely no limits. So, can free pricing actually be good for the people and the economy in general? Let’s dig a little deeper to see the merits of a free market system.

When I was a kid, I remember standing in lines for hours together to buy the tickets to watch a movie. Back then, I was oblivious to the fact that all those hours fighting with the crowds to buy tickets, was a gift of government’s do-good regulation. What did these long lines, in retrospect, indicate? There are more people wanting to watch the movies and there isn’t enough supply of seats. In a free market system, higher demand is usually met with increased supply. Extra seats were not added to the system, because there isn’t enough money to be made, as the ticket prices are capped. In a free society, the market will reach equilibrium where demand, supply, and the price are in a natural balance.

Now, when a block buster movie like Rajanikanth’s Robo is released in India, there is tremendous interest among the masses to watch the movie. Given that the ticket prices are fixed at an artificially low level, a lot of people can afford to watch the movie and will want to see it in the first week. However, the number of seats available is limited. As a result, crowds build outside the theater for the tickets, where people wait for hours together.

How would the same scenario work in a free market? Theaters would charge a much higher price for a ticket in the first week. As the demand starts dropping in the second week, the ticket prices will drop. This reduction in price could go to extreme lengths. For example, in the U.S., there are theaters that play few week old movies for a buck, yes just one dollar. As you can see, charging a higher price in the first week of the movie release is not necessarily an anti-poor policy, because the movie can be watched for very little money by those that cannot afford higher prices. In fact, the movies playing in a free market could end up being priced at a much lower price point than the government imposed price cap. This is because people will have a range of choices from going to a high end theater to a low end theater versus finding a theater that is in the center of the city versus something away from the city at a lower price point.

Now let’s look at the effectiveness of regulation. Anyone that grew up in a socialist system would know that regulations are rarely effective. Regulations are used by government officials and politicians as a pretext to take bribes. Free market forces with their profit motive are happy to accommodate corrupt officials, as long as the business makes net profit after paying the bribe.

Going back to my childhood experiences of buying movie tickets, when I used to stand in the line for hours together, hawkers who came much before I used to, managed to buy tickets at the box office. These hawkers would then re-sell the tickets at a far higher price to people that did not want to wait in line. The tickets sold in this manner were called “black tickets”. So, even though, on paper the price of a ticket is capped, market forces have discovered that there is a market for higher prices and started cashing it in. The police learning about this illegal activity entered the scene to control it. I was an eye witness to the hawkers being caught red-handed by the cops. These hawkers used to get beaten-up in public by the cops to set an example to other hawkers.

However, things changed gradually. Theaters started realizing that there is an untapped market for higher prices for their tickets. They started selling only a portion of the available tickets through their box office. For the remaining tickets, they colluded with the cops by bribing them and started selling them in “black” to the public at a higher price. Examples such as these, where a regulation is used by the bureaucrats in India as a mechanism to earn money are endless. This is not unique to India either- many socialist countries display the same tendencies.

Now, let’s look at the impact of this regulation on the movie industry. In a free market it is likely that movies will earn more profit than in a system where ticket prices are capped. However, this is not necessarily bad. More money going into the movie industry usually means the producers have more capital to invest on their next project. Let’s take the example of Tollywood, Bollywood, and Hollywood. There is no question that the quality of movies made in Bollywood are better than those made in Tollywood. Similarly, Hollywood movies are far superior in quality than Bollywood. For example, Bollywood cannot afford to make a big budget movie like Avatar.

When I speak to friends, they are usually in a kind of awe for Hollywood. They typically attribute this to American ingenuity. In my view, that is a false notion. People on average have about the same levels of intelligence irrespective of geography. Americans don’t make better movies because they are smarter than others. The market that Hollywood reaches is much larger than what Bollywood can reach. This results in higher profits, which act as a fuel for bigger and better movies. Similarly, Bollywood in India has access to much larger market than Tollywood, hence the apparent quality difference.

Lastly, good morals and good economics often go hand in hand. How is it fair to charge the same price for a movie made with $1MM and $10MM? Some theaters have excellent facilities, while some don’t. Some theaters are in central locations, while some are in remote areas. Some movies have big stars that demand sky-high remuneration while some movies rely on second tier actors. Does it make sense to cap the ticket price given all these variations? Why not let the movie goers and the movie industry voluntarily negotiate the price to be paid to watch a movie? This kind of freedom rarely results in a monopoly power where a common man is fleeced, as it is propagandized by the socialists. If a theater is making a lot of money, it inevitably invites competition. Competition will result in lower prices and/or higher quality.

Government should not intervene in the marketplace where goods and services are exchanged voluntarily without coercion. In the absence of government intervention in the movie industry, there will be far shorter lines to buy the tickets, the size of the movie industry will increase and the employment it generates will grow, quality of the movies will improve, and prices of the tickets will become affordable as there will be a whole range of choices.

10 Comments

  1. Chakravarthy,

    This is a good example of how free markets work in an ideal situation. And you described it well. However, your argument that ‘only the government involvement spoils everything’ is seriously flawed. When I find some time, in the next couple of days, I will expand your example with a case or two where fraud and corruption enters this free-market system of movie ticket pricing.

    Heads up – fraud seeds in this sector have are already sown in this country. Hint: it didn’t get start in the government sector.

  2. @Chakravarthy garu
    “The market that Hollywood reaches is much larger than what Bollywood can reach. This results in higher profits, which act as a fuel for bigger and better movies. Similarly, Bollywood in India has access to much larger market than Tollywood, hence the apparent quality difference.”

    Agree, English movies have global presence, we have to take into account of the “Black Money” made on Bollywood and Tollywood. The Indian industry still hides payments and collections. There is awful lot of money circulated off the books. Besides Bollywood reaches African and South Asian countries ( and continuing to reach) no one calculates the revenues from these places.

    • Bhanu garu, I see what you are saying. But speaking broadly, when you aggregate the money made by Hollywood vs. Bollywood, I am certain there will be a significant difference in earnings between the producers of Hollywood vs. Bollywood. I am sure there is some independent research out there that talks about market sizes. Please do share if you see anything.

  3. Free Market is not always good. There needs to be a social or human element. I may be poor but still like to see movie the first day for which I dont mind standing the first in line on any thanks giving day. Free Market principal is just like good looking or a rich woman being eligible for too many boy friends. There needs to be a social element.

    • The so called regulation to help the poor, almost always works against them.

      Let’s hypothetically say theaters charge Rs. 50 first week and Rs. 20 second week. I believe, given a choice, a large majority of poor would prefer to wait a week and watch the movie for Rs. 20. When the government imposes cap, the poor pay Rs. 50 no matter how long they wait. They are denied of choice and in fact a good number of them probably don’t watch the movies because of the high cost.

      Don’t we all wait for a “sale” at our favorite retail store? Often, it is not the rich, but those who cannot afford the full price are the ones that take advantage of these. Go to a super market and look at who uses the coupons the most- often it is not the rich.

      Now if you want to put a cap on movie tickets, why not put a cap on other items? Cap on cost of rice, on the price of a house, price of the clothes, price of the cars. Welcome to socialism!

      • Chakravarthy garu,
        It funny that I see the opposite in using super market coupons.I noticed many times rich people using super market coupons more than the poor people.
        Go to any dollar store you will be more no of Mercedes/Lexus/BMWs parked there as opposed to Chevy/ Kia / Hyundai :-).

        Good discussion though.

  4. Chakravarthy garu,
    Good analysis. As usual I do not agree with you completely. The system works well in both the countries. Free market works here. Movie ticket regulation works in India. In India, there is supply demand equilibrium in a different way. If ticket prices are lower or regulated then the movie runs “HOUSEFUL” longer time creating buzz. This buzz will create more repeat movie watchers (I watched few movies three to five times). OTOH, if the prices are high, the movie is viewed by few upper class people ending the theater not in “HOUSE FULL” status. This will cool off the buzz. And there will be no repeat viewers. Overall it’s a volume business. The math there is based on first week collections and how long it will take to get the “cost of the reel”. Once the breakeven occurs, the theater owner rakes in profits each time the “House goes Fulll”. In the end one blockbuster movie runs for months / years. The theater owner will not buy another movie reel unless he is guaranteed to make more money than the current movie. This will actually create a free market economy. Movies have to be better than the current one.

    The key in Indian system is to run the movie long at cheaper price, here it is run at a high price for couple of weeks then dropping to a dollar in a month or two.Here in small towns there are more things to do then to watch a movie. In India (least 70%) most of the favorite past time is Movie. And these 70% are not rich enough to buy higher priced tickets. If you are a poor guy but a big RAJANI fan, you can try your luck on the first day. You can gatecrash, push few folks, stand in line, hold the bar, block others and finally push your hand through the small ticket window for “that first show ticket”. If you are lucky you can pull your hand back with “correct change and ticket” 

    At least Rajanikanth would be happy that his greatest fan watched his movie for the first of the many times in coming months.

    • “HOUSEFUL…buzz…repeat business”

      Your logic makes sense. But is it the government’s role to come up with that math? Government is the last place I would go to for help with revenue and profit maximization.

      Leave the movie industry alone, it will come up with a revenue model that is better than you and I possibly can create. Laissez Faire!

      • Chakravarthy garu,
        Your logic makes sense. I agree with you about not putting the price cap on goods. However , you have to agree that food (Rice not pizza), house (Home to sleep not mansion), clothing (Regular cloths not Suites and Ties) and health (cancer treatment not plastic surgery) have to be available for everyone in capitalism or socialism or communism. So regulation is needed on these things. Any system that fails to recognize the basic necessities will eventually loose. Lately even the most capitalistic of American corporations are thinking about ethics and human elements.

        Overall I am with you on removing the price cap on movies, but in only Indian Cities.In small towns / villages you can say cinema is a need for poor people. so regulation is needed.Think about the scenario where a rickshaw puller starves his family to watch Rajini’s movie on the release day. He cannot control his urge and wait for the free market work its way to lower ticket price. End result is that a family starves for a day.

        • Charity for acute needs is understandable. Free societies are often the most charitable and can meet the acute needs of the society and may be government has a limited role if NGOs cannot handle the situation. For example, cyclones, earthquakes etc.

          Now, does this happen anywhere in the world? Does govt stop with limited charity? Does the new healthcare bill fall under the category you described? Is medicaid for poor? Is fannie/freddie and affordable housing policies for homeless people? Is social security for the poor who are starving on the streets? why is it government’s business that i am incentivized to put money in 401k for retirement? I can go on and on….