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Could Variable Ticket Pricing Save the Movies?

Regal is betting you’ll pay more for in-demand showtimes the way you pay more for the most popular flights. It’ll be just like in the olden days.

Why has it taken so long for movie-theater chains to try a radical price overhaul?
Why has it taken so long for movie-theater chains to try a radical price overhaul?

Thor: Ragnarok is guaranteed to be a blockbuster. The newest Marvel movie hasn’t yet opened in the U.S., but it has already earned more than $100 million overseas, and analysts project at least another $100 million at the domestic box office this weekend. Even so, at my local multiplex in Brooklyn, the price of a Thor ticket will be the same as one to see A Bad Moms Christmas (which is predicted to be a much smaller hit) or even tickets for old-news titles like The Foreigner, Suburbicon, and Boo 2! A Madea Halloween.

From an economic point of view, this makes no sense at all. In The Wisdom of Crowds, published in 2004, James Surowiecki noted that flat movie-ticket pricing “is not a well-considered approach to profit maximization.” Demand for tickets varies in predictable ways with the quality of movies, how long they’ve been in theaters, and the timing of release. People also see more movies on the weekend, in the summertime, and over Christmas break. Yet ticket prices never seem to vary with the season, nor have they been pegged to other maybe-useful metrics such as films’ production budgets, their expected popularity, or their Rotten Tomatoes ratings. Theaters’ unwillingness to develop a more flexible pricing scheme, wrote Surowiecki, is “one of the more perplexing examples of the triumph of convention over rationality.”

Thirteen years later, there are some signs that the film industry may at last be shaking off its money-losing habit. In a conference call last week, the CEO of Regal Entertainment Group—the nation’s second-largest movie-theater chain—announced plans for an “alternative pricing model” for tickets, to be tested early next year, that will drive “incremental revenue in peak periods and incremental attendance in nonpeak periods.” In other words, Regal intends to grab all the money that’s been left on the table by the old, flat pricing scheme, where most movie tickets cost the same.

Why has it taken so long for chains like Regal to try a radical price overhaul? The seminal work on this question came from two doctoral students at Harvard, Liran Einav and Barak Orbach, who put out a discussion paper on the topic in 2001. They started from the puzzling observation that, at their local movie theater in Harvard Square, they’d paid the same amount for tickets to see Titanic, one of the biggest movies ever, and The Postman, a legendary flop. Uniform pricing schemes could be found in other industries: Different kinds of soda tend to cost the same, for example, even though some are much more popular than others. The same could be said for ice cream flavors, music CDs, and clothing of different sizes or colors. For Einav and Orbach, though, the situation seemed especially bizarre when it came to movies.

Their paper goes through the most common set of explanations for the practice in the movie business. Maybe movie theaters stick with standard prices, they proposed, because anything else would seem unfair to the public. Or maybe it would be too burdensome for movie theaters to administer complicated pricing schemes. Or maybe it’s that theaters really have no idea which movies are going to be popular, so they don’t know how to vary prices most efficiently. Or maybe theaters don’t care that much about ticket prices to begin with because they make bigger profits from popcorn and candy sales.

While all these theories may have merit, Einav and Orbach said they were insufficient to explain the whole phenomenon. Indeed, theaters had used flexible pricing in some form for most of the 20th century.
In 1915, for example, blockbuster-pioneer D.W. Griffith boasted to the New York Times that people would pay much more to see his better, higher-budget films. The previous record ticket price had been just 50 cents, he said, but his latest movie, The Birth of a Nation (then called The Clansman) was bringing in $2 per seat. “If they are willing to pay 5 cents to see a picture that costs $500 to produce and 50 cents to see a picture that costs $50,000 to produce, they are willing to pay $2 to see one that costs half a million to produce.” He went on to argue that, by extension, the makers of a $2 million movie could get away with charging $5 for each ticket, or the equivalent of $125 today.

The headline on the article was “Five Dollar Movies Prophesied,” and Griffith wasn’t wrong. Through the 1960s, the most expensive tickets were for “roadshow” releases of prestigious movies such as Gone With the Wind, Fantasia, and The Sound of Music. The limited-run tickets came with reserved seats and an intermission, all of which set them apart from the latest B-movie Western or creature feature. By the time MGM began advertising its 1969 roadshow rerelease of Ben-Hur, the $5 movie (which was then the equivalent of a $34 movie today) had become a reality, even as the average ticket price was still around $1.42 (the equivalent of about $10 today). And this wasn’t the only kind of price variation. A 1947 story in the New York Times describes an intricate pricing scheme that varied with the showtime and day of the week: Tickets were 55 cents from opening until 1 p.m. on weekdays and 70 cents till noon on Saturdays; they were 90 cents from 1 p.m. to 6 p.m. on weekdays and $1.25 from noon to 5 p.m. on Saturdays; night prices were $1.20 on weekdays and $1.50 on Saturdays; Sundays prices were still another thing; holidays were priced as if they always fell on Saturdays.

Starting in the 1970s, however, uniform pricing took hold.
It seems to have started after 1972, when The Godfather opened nationwide with a standard ticket price. That movie was the Titanic of its day and a model for the industry. (“No other film has grossed as much in so short a time,” crowed its distributor several weeks into the run.) That this pricing trend has persisted for so long struck Einav and Orbach as mysterious. “Movie theaters seem to ignore the egregious patterns of the demand for their products, and deny the law of supply and demand,” they concluded.

In the years since their paper made the rounds, theater chains have taken some steps to fiddle with convention, meaning that how much you pay may depend not just on where you live and which multiplex you visit but exactly when you choose to see a film and in which format. It’s more common now to see discounts offered on weekday screenings, and theaters charge a premium for seeing films on better screens or in three dimensions. (The once-prophesied $5 ticket is today’s Tuesday ultradiscount.) Meanwhile, changes in home-viewing technology have also paved the way for novel pricing schemes. In an era of iTunes rentals and other on-demand services that charge different rates for different movies, we’re more accustomed to fluctuating costs than we were before.

Theater chains also have more data, says Jehoshua Eliashberg, a professor of marketing at the Wharton School of the University of Pennsylvania and an expert on the motion-picture industry. That informational cornucopia should make it easier for them to estimate the market for a given screening on a given day. In its announcement last week, the Regal CEO said her company would be partnering with the maker of a social networking app called Atom Tickets—sort of like a cross between Facebook and Fandango. Atom, which has substantial backing from several machers in the industry, has promised that its capacity for “predictive analytics” and “dynamic ticket pricing” will boost revenues for movie theaters and distributors.

If this model works for Regal, and if it were to spread to AMC Entertainment, Cinemark, and all the other theater chains, what would that mean for moviegoers? It could be that Thor: Ragnarok would cost a little extra. But what about the smaller-market art house flicks and foreign films—would they drop in price because not that many people go to see them, or might they get even more expensive since they cater to a well-heeled niche?

“I expect variable pricing would have more of an effect on the smaller films,” Eliashberg told me. Movies like Thor: Ragnarok are popular enough that theaters wouldn’t see much benefit from giving off-peak discounts for weekday screenings. (In economic terms, the demand for them is inelastic.) The theater chains have more to gain, he says, when it comes to all the other, less successful movies that play on the nation’s 40,000 screens. “The theaters don’t manage their screens effectively,” Eliashberg explained. “They leave a movie to play even when demand is such that only 10 people are there to see it.”

If the theater chains were more aggressive with their pricing, he continued, they could drive demand to these lower-budget movies. A major discount for a Tuesday screening of The Big Sick, for example, would bring more people to the theater, and this in turn would boost its revenue, increasing the incentive for producers to invest in movies like The Big Sick. “Right now the production of independent movies is limited because the demand is limited,” said Eliashberg. “If you can increase the demand and increase your revenue … then you would see more producers getting into independent-movie production.”

In a 2013 law review article, entertainment lawyer Harrison Reynolds argues that the introduction of variable pricing might do for movies what the rise of premium cable did for television. The present system, in which ticket prices always cost the same, inclines the industry to cater to the broadest possible audience, he argues. There’s less pressure to create “works of outstanding quality” since those appeal to narrow slices of the viewing public. According to this argument, Eliashberg has it backward: Under variable pricing, theaters might start charging more for such films instead of less. Instead of a Tuesday discount for a smaller film, they could put in place a sort of premium for excellence. In that case, Reynolds suggests, the incentives would be very different.

Not everyone believes these claims. When I got in touch with Orbach—who is now a business law professor at the University of Arizona—he was very gloomy on the topic of his movie research. He doesn’t think much of Atom’s prospects for success, nor of the industry’s supposed shift, at long last, away from uniform pricing. He said he hears from business school grads with startups every year, and they all have big ideas for how to optimize the movie-theater business with special algorithms for maximizing profits. “I try to be open-minded with these people,” he told me. “But they all fail, without exception.”

The central problem, he explained, is that when you cut the price for a specific movie, it sends a signal to the viewer that the movie kind of stinks. Instead of pushing up demand, the change in price could send it into free fall. What about more dramatic discounts according to the timing of a screening? Orbach once thought “discount days” could be effective. (There’s evidence that “cheap Tuesdays” have been good for the movie business in Australia, for example.) But now he says these promotions have been tried repeatedly in the U.S. and that they’ve never really worked that well.

The efforts we’ve seen in recent years—to charge lower prices for some weekday showings and to hike up the cost of seeing films in Imax, 3-D, or both—have helped a bit, he says, but the industry has been wringing drops of profit from a desiccated business model. With so much content for you to watch at home on your big, high-definition TV, demand for movies at the theater has declined. According to the latest numbers from the Motion Picture Association of America, the average American went to see 3.8 movies in 2016, down from 4.4 in 2007. Movie-theater chains have suffered extra damage in the past few months after an abysmal summer at the box office. Indeed, in last week’s conference call, Regal’s CEO mentioned other ways the company has tried to stanch the bleeding—with luxury recliner seats and expanded food and alcohol menus.

“This will fail, I assure you,” Orbach said. While variable ticket pricing might have made a difference 10 or 20 years ago, at this point he doesn’t think it will do that much to save an industry in trouble. Nor does he agree with Eliashberg and Reynolds that variable pricing will inspire the production of more high-quality, lower-budget films. As a rule, theatrical distribution is a money loser for independent movies, he said. When those films are put out in theaters, it’s done not so much for profit but “for love.”

For years, Orbach, Eliashberg, and other academics have been meeting with movie-biz insiders at an annual conference on the economics of the industry. The mood at these meetings has been deteriorating, Orbach said. “You can feel the pain in the air, and every year, it’s more and more painful. … Now when you bring in people from the industry, [they] almost sound like coal miners from West Virginia. They just look a little different.

“It’s heartbreaking for a person like me,” he continued. “In another era, variable pricing might have led to more demand, and been a huge improvement. But they missed the boat already. My view is that Regal is using a shiny object to distract attention from their poor performance. It is a bluff.”

I told Orbach that he was making me sad.

“Look, I’ve been in this for a long, long time, and it becomes sadder and sadder,” he said. “I’ll tell you why. This is the world that you grew up with, and many of your good memories are from this world. Many of your experiences with your wife, or of other relationships, were associated with the movie theater. Many of our memories are about the movies and how we consumed them. I mean, this world was magic for us—and this world is vanishing.”

After getting off the phone, I went back for another look at the prices at the nearest multiplex, which happens to be in the Regal chain.
Here’s what I discovered: If I’d like to see Thor: Ragnarok on Thursday, at a normal, 2-D screening, I’ll have to pay $16.20 for the ticket; if I go Friday morning, the same film will cost me $12.40; if I wait until the afternoon, the price will bounce to yet a third price, $16.40. I mean to say, my local theater is already tweaking prices to maximize demand, and yet I’ve barely noticed. Ten or 15 years ago, when I went to movies all the time, these changes would have mattered more to me; these days I just don’t care. Maybe Orbach has it right: I’m watching more at home as time goes by, and complicated updates to the movie-ticket pricing scheme won’t reverse that trend.

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