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The Revenue Impact of Differential Seat Pricing and Competition in the Movie Theater Market

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Abstract

This study empirically investigates the revenue return to differential seat pricing in the Korean movie theater market and how it is affected by competition. In March 2016, one of three major multiplex chains in the market divided the seats in most of its screening auditoria into prime (high-quality), standard (medium-quality), and economy (low-quality) zones, and started charging different prices for each seating zone. For the analysis, we construct a unique dataset that contains ticket prices and the number of tickets that are sold at the show level. We find that differential seat pricing increases revenue on average by 10.6%, but does not affect the number of tickets sold. Based on the results, we suggest that in a situation in which a large number of seats remain unsold, the pricing scheme involves encouraging the sale of the prime zone seats by increasing their price only slightly. By measuring the degree of competition as the number of showings of the same movie that are played by neighboring theaters at a similar time, we also find that competition has a small negative effect on the revenue gain from differential seat pricing. This finding may be explained by switching costs that are due to moviegoers’ being away from preferred theater locations and showtimes.

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Notes

  1. Orbach and Einav (2007) discuss various reasons for the persistence of uniform pricing in the movie industry. Courty (2011) shows that a monopolist prefers to use uniform pricing for differentiated products if low-valuation buyers are more likely to obtain high-quality products.

  2. In the entertainment industry, the practice of differential seat pricing is known as “scaling the house.”

  3. Note that differential seat pricing in a movie theater is a good example of second-degree price discrimination, since it is difficult to explain observed price differences across seating zones by the costs of providing seat quality.

  4. For the revenue impact of second-degree price discrimination in other contexts, see Shiller and Waldfogel (2011) and Levitt et al. (2016). Their results are based on survey data in digital music and a massive field experiment in online games, respectively.

  5. Borenstein (1985) and Holmes (1989) examine the effect of competition on third-degree price discrimination.

  6. Other studies have investigated the impact of competition on price dispersion in settings in which third-degree price discrimination is used or when only price data are available (Borenstein & Rose, 1994; Gerardi & Shapiro, 2009; Dai et al., 2014; Chandra & Lederman, 2018).

  7. They are vertically integrated with distributors, CJ E&M, Lotte Entertainment, and Megabox Plus M, respectively.

  8. There are a few seats that do not fall into any of the three seating zones such as seats for wheelchairs and couples.

  9. When differential seat pricing was introduced, the three multiplex chains were already engaging in price discrimination based on time slots (such as day-of-the-week and/or time-of-day).

  10. For a show that played in a premium auditorium on December 23, its ticket price was 80,000 KRW, and all 226 seats were sold out.

  11. A premium auditorium is designed to offer a better movie-watching experience (e.g., a customized curved screen, fully-reclining chairs, advanced quality sound).

  12. The capacity utilization of each seating zone is the ratio of occupied seats in each zone to total seats.

  13. In the same vein, Mazzeo (2002) uses the annual average daily traffic that passes by a market exit to control for motel demand. Abraham et al. (2007) use the proportion of commuters traveling at least 45 min to work to control for hospital service demand.

  14. In 2016, the penetration rate of cellphones in Korea was 122.7% (Statistics Korea).

  15. Loyalty programs for CGV, Lotte Cinema, and Megabox are CJ ONE, L.POINT, and Megabox membership, respectively.

  16. The magnitude of our estimated elasticity is similar to that in Canterbery and Marvasti (2001), who find that the price elasticity of movie demand ranges from \(-\)0.23 to \(-\)0.51 using 1965–1991 time-series data for the U.S. movie industry. The authors regard such inelasticity as a measure of the success of the major studios in differentiating their products through non-price competition.

  17. In their field experiment, Dubé et al. (2017) find almost no substitution between two competing theaters, which is consistent with strong idiosyncratic preference for a specific theater. In addition, according to the authors, industry practitioners do not believe that most evening moviegoers would substitute for a show before noon.

  18. As noted in Subsect. 3.2, the average capacity utilization of the U.S., Canadian, and German movie theater markets is about 20%, 22%, and 12.3%, respectively.

  19. Similar figures are obtained for other random samples.

  20. As shown in Table 1, 40.7% of total seats in an auditorium are assigned to the prime zone on average. Thus, in shows with less than the capacity utilization of 40%, opportunistic behavior of economy zone ticket holders is possible.

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Authors and Affiliations

  1. Department of Economics, Incheon National University, Incheon, Korea

    Gihwan Yi

  2. Department of Marketing, National University of Singapore, Singapore, Singapore

    Min Kim

  3. Department of Economics, Kangwon National University, Chuncheon, Korea

    Hoe Sang Chung

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  1. Gihwan Yi
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  2. Min Kim
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  3. Hoe Sang Chung
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Correspondence to Hoe Sang Chung.

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The authors thank seminar participants at the Bass FORMS Conference 2021, the INFORMS Marketing Science Conference 2018, University of Maryland, and Sogang University for their helpful comments and suggestions.

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Yi, G., Kim, M. & Chung, H.S. The Revenue Impact of Differential Seat Pricing and Competition in the Movie Theater Market. Rev Ind Organ 64, 361–382 (2024). https://doi.org/10.1007/s11151-024-09944-2

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