Price Discrimination in Cinema Market - Research Paper Example

Price Discrimination in Cinema Market Contents Introduction 3 Analysis 4 Price Discrimination in Cinema Market 4 Price Discrimination and Cost Structure 6 Market Conditions required for Price Discrimination 7 Ethical Perspective of Price Discrimination 8 Conclusion 10 Reference List 11 Introduction The industry of film and cinema making comprises several firms that are commercial as well as technological in nature. With rise in per person income level in the contemporary world, the disposable income proportion spent by individuals for comfort or entertainment purposes has also increased significantly. The cinemas markets have expanded considerably in recent times with the essence of high living standards of individuals. The most popular box office markets are United States, China and Japan; however, it is interesting to note that large number of films is produced in developing nations like, India. The notable rises in number of multiplexes in contemporary economies and the rising number of superior services available in such entertainment hubs point out surplus profits generated by the multiplex global giants as well as foreground prosperity of the industry. Nowadays, films are produced for individuals of all ages. So, target customers’ base is wide when estimated in terms of demographic factors. However, it is obvious that potential visitors of multiplexes are young and middle aged film lovers. The scope and scale of commercialization in the market of cinemas have remarkably improved in the recent years. Some of the giant multiplex companies like, Golden Village in Singapore, acts as a monopolist in the cinema market. In order to expand their business profits, these companies implement specific pricing strategies like, third degree price discrimination. Nonetheless, it is found that the precise discrimination on prices of the services in such multiplexes is settled after analyzing potential customers (through market segmentation) and estimating elasticity of demand generated by the same. This paper will elaborate and examine the price discrimination strategy introduced by the multiplex company, Golden Village in Singapore, on film tickets in the market. Analysis Price Discrimination in Cinema Market The price discrimination strategy is a common tool adopted by cinema operators for maximizing business profit. Through implementation of a versioning or product line stretching program, these companies charge higher prices to same groups of customers for superior and newer services. For instance, Golden Village charges $8.50 per movie ticket on weekdays. However, for the same shows, the company sets $ 11.50 price per ticket on weekends. At the same time, the company charges $ 4.50 per ticket for the show on weekdays for senior citizens; whereas, charges $7.00 for same ticket on the same day for young students. Thus, if observed in details, the company discriminates on its ticket prices on the basis (methods) of time, degree of iteration of customer visit and age. From the above analysis, it can be claimed that the company implements third and second degree price discrimination strategy, while settling prices of its movie tickets. Under the regime of second degree price discrimination, the company charges higher for each ticket when a movie newly releases in the market and lowers the ticket prices gradually. Figure 1: Second Degree Price Discrimination (Source: Mankiw and Taylor 2006, 130) Given that customer’s willingness to pay falls with time, price of the ticket for a movie released also drops. Through third degree price discrimination, the company charges separate prices to different groups of customers, as per their age and time of ticket purchase. Figure 2: Third Degree Price Discrimination (Source: Mankiw and Taylor 2006, 143) As shown in the above graph, market segment 1 and 2 varies in terms of customer’s age and time of purchase. Price Discrimination and Elasticity of Demand Elasticity of demand measures degree of responsiveness of rate of change in quantity demanded with respect to rate of change in price level of a product or a service. Figure 3: Elastic and Inelastic Demand Curve (Source: Mankiw and Taylor 2006, 78) The company charges higher from customers whose demand is relatively inelastic in nature. Even so, it charges higher during occasions (New Year and Xmas) from the client, given that demand for movie tickets on such occasions is high and inelastic. However, on weekdays, the overall ticket prices are low as demand remains relatively elastic (Ross 1979). Price Discrimination and Cost Structure Golden Village acts as a monopolistic seller in the market. Thus, like any other business corporation, the company experiences Fixed and Variable costs of production or service generation. Figure 4: Cost Structure of the Company (Source: Author’s Creation) Even if the company ceases its services in the market, it would face certain Sunk or Fixed costs in business. The variable cost would be 0 in case of no production, but even then the company would experience Sunk cost in business (Orbach and Einav 2007, 127). Figure 5: Profit under Price Discrimination (Source: Mankiw and Taylor 2006, 156) The feasible pricing strategy for the company, without price discrimination, could be at the point where the marginal cost (MC) curve would cut the marginal revenue (MR) curve from below. Nevertheless, with the essence of price discrimination, the company charges higher prices, like, P1 and P2 and grabs a higher amount of consumer surplus from the market. Market Conditions required for Price Discrimination The strategy of price discrimination cannot be applied in a market, where the precise conditions are perfectly competitive in nature. Certain market asymmetry or imperfection is an indispensable requisite for application of the strategy of price discrimination (Woodford 2003, 144). There are inherent characteristic features of the cinema industry, which empowers giant multiplex owners to discriminate among its customers on basis of ticket prices. These are provided in the following table: Requisite Condition Implication Differences among buyers’ ability and willingness to pay for movie tickets Without a significant difference between buyer’s willingness and ability to pay, the company would not be able to establish any lucrative ground on basis of which it would discriminate among customers in terms of its ticket prices (Courty and Pagliero 2009). Exclusive market power of the multiplex owner The price discrimination strategy can only turn out to be worthwhile if the seller enjoys some unique competencies over other competitors in the industry. Such competencies can be in form of economies of scale or superior halls with advanced sound system in a multiplex. These rare attributes transform multiplex owner into a ‘price maker’ in the industry (Courty and Pagliero 2009). Existence of affluent customers who does not prefer to purchase low priced movie tickets Without the essence of this factor, a company will not be able to charge higher prices on tickets from certain customers on the basis of service quality and experience. The movie tickets are items that cannot be sold for the second time, after the first purchase. If movie tickets sold by a company are purchased for the purpose of resale, it would be difficult for the company to maintain high prices for the tickets (Courty and Pagliero 2009). Ethical Perspective of Price Discrimination The theory of economics states that the price and quantity determined in a competitive market structure is the best. This is because net social welfare in an economy as well as producer and consumer surplus in a market maximize under this market structure. Nonetheless, price discrimination makes the producer alter the price level of products to one that is significantly different from the market clearing competitive threshold. Such policies are highly beneficial for the producers. Yet, such type of discrimination among buyers is highly unethical in nature. Figure 6: Maximum Consumer Surplus in Perfect Competition (Source: Author’s Creation) The above graph shows that consumer surplus or well-being is highest when the economy is at market equilibrium. Figure 7: Unethical Price Discrimination Strategy (Source: Mankiw and Taylor 2006, 160) As shown by the above graph, price discrimination strategy implemented by the multiplex owner, Golden Village, is unfair for customers of the company. This is because by implementing this policy, the company grabs the whole set of consumer surplus from the market and adds to its profit (McAfee 2009, 23). However, it should be noted that the level of price charged for each movie ticket is inversely proportional to the elasticity of demand for the product. Like the group of customers who are charged price P1 has relatively less elastic demand than the customers who are charged price P4. Conclusion The scope and scale of commercial activities in the cinema market have significantly improved over time. The high degree of commercialization in this industry has occurred due to excessive expenditures made by customers. However, without adequate political and legal intervention activities in this industry, some multiplex giants have become potential monopolists in market. These monopolists have actively utilized the effective tool of price discrimination to expand economic surplus base in the market. The context of the paper has elaborated on the case of Golden Village, a giant corporation owning ten multiplexes in Singapore. The data provided in the case study clearly showed that the company discriminates among customers on the basis of their demand elasticity. At the same time, it was also found that the organization tried to focus on its potential customers’ demand elasticity based on their time of ticket purchase and age. It can be rightly concluded that such policies are unfair towards consumers as their wellbeing is grasped by the market. Only public authorities in a nation can successfully help to augment competition in this industry, thereby lowering effectiveness of price discrimination policy (Corsetti and Dedola 2003, 222). Reference List Corsetti, Giancarlo M. and Luca Dedola. 2003. Macroeconomics of International Price Discrimination. London: Centre for Economic Policy Research. Courty, Pascal and Mario Pagliero. 2009. “The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry.” Accessed 5 March 2014. http://www.carloalberto.org/assets/working-papers/no.105.pdf Mankiw, Gregory N. and Mark P. Taylor. 2006. Microeconomics. Connecticut: Cengage Learning EMEA. McAfee, R. Preston. 2009. Competitive Solutions: The Strategists Toolkit. Princeton: Princeton University Press. Orbach, Barak Y. and Liran Einav. 2007. Uniform prices for differentiated goods: The case of the movie-theatre industry. International Review of Law and Economics 47: 1-26. Ross, Stephen A. 1979. “The Economic Theory of Agency: The Principals Problem.” American Economic Review, 63: 134-139. Woodford, Micheal. 2003. Macroeconomics. New Jersey: Princeton University Press. Read More