Saturday, March 31, 2012

Film Prices put Economics on its Head

As Drake discusses in the article, the price to see a film in movie theaters is set at the same price for all individual films. This is a very interesting point that is made by Drake because economics in a capitalistic market would say that the individual films should be able to control their prices for viewership. In terms of  the risk it is pretty obvious that these movies released at the same time have up to hundreds of millions of dollars invested that are at risk. In the modern age of film making there is a struggle to decide on whether the studio should spend this large amount, or make it a smaller budget and risk making a movie with less quality.
With this becomes the important part of the consumer. With an industry that offers heterogeneous products for the same price, that also have different sunk costs, it will be driven by the consumer. There is no other market, other than in the media, that sets up their pricing model this way. This leads to a lot of risk where a few films can essentially have an oligopoly over the entire market. describes an oligopoly as two or more "firms" controlling the market. In this case the firms are films but I truly believe that is what we are seeing in today's movie market. Go here to see what the box office numbers are for the past weekend along with their total gross revenue on the right side. As you look at the numbers you can see that, as movies are not allowed to price discriminate based on their demand it creates an equal opportunity for consumers to choose which film they want to see.
Although there is this peculiarity in the film industry, marketing can play a very large role in reducing this risk of a film "flopping" in an oligopolistic market. One example that I can think of comes from a few years ago when Will Ferrell made a string of movies that were questionable to say the least. When he made the films Land of the Lost and Super Pro there were a lot of skeptics that said these films would not do well. Just by putting Will Ferrell in these films and marketing them for countless times on TV and in the media they were able to have successful box office revenue. A more recent movie that I can think of tailored more towards the younger college aged generation that did this was well was Project X. They created a movie with a small budget, and marketed it to our demographic to the extreme. With this model they were able to see quite a lot of success as well in the box office. So, although the economics of the box office film industry are upside down to an extent, it allows it to be a true market run by the largest movie critic that is the consumer.

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