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.