Big Screen Price Discrimination

AMC Theatres recently set its sights on blockbuster profits when it launched Sightline at AMC, a ticket-pricing system based on a seat’s view of the theater screen. The Twittersphere had mixed reactions to the company’s plan, with some arguing that Sightline is simply a way to drive up premium membership numbers and will hurt some moviegoers. Regardless of AMC’s intentions beyond increased profits, this is far from its first venture into the arena of price discrimination. Only time will tell, however, if Sightline will be a box office bomb or a smash hit with audiences.

Price discrimination, a staple of every introductory economics course, comes in three degrees. Pure (first-degree) discrimination charges consumers the maximum price each individual will agree to pay; auction sites like eBay provide consumers the opportunity to buy at their maximum price. Second-degree discrimination involves discounts for bulk purchases at stores like Costco or Sam’s Club. Third-degree discrimination groups individuals into different consumer categories based on specific characteristics like location or demographic information. Broadway shows, large concerts, and major-league sports venues have used third-degree price discrimination in their ticket pricing for years. AMC already practices a form of market segmentation in its AMC Stubs membership program, made for the small proportion of the movie-going population that places high value on the theatrical experience. AMC grants discounted tickets to students, seniors, the military, and those willing to see an afternoon matinee, because these groups may increase their big-screen movie consumption at a discounted price. AMC expects these groups to pay less because they value the experience less, just as someone who would gladly pay a little less to see the movie by sitting in the front row during prime time.

Economics has a long and storied history of faulty production-biased theories of value and price, and people remember them. The value of a theater seat does not come from the amount of labor required to build the theater or serve the patrons, but from the subjective demand in the market. In this case, AMC’s “Value Sightline” tier lowers ticket prices two dollars below the standard price in the hope of luring consumers out of their homes and away from other theaters. Those just beyond the margin, the people who previously would not go to the movies, might. Those who value the theatrical experience to the highest degree can purchase the “Preferred Sightline” tickets for a one-dollar premium and claim seats in the center of the theater. Whether these discounts and price premiums capture any additional demand depends on consumers’ seating preferences and price sensitivity for the theatrical environment, given the huge number of substitutes available through streaming services. The untapped audience’s willingness to pay for watching a movie on the big screen might not be as sensitive to lower ticket prices as AMC hopes.

Time will tell if AMC’s new method of price discrimination will increase ticket sales and help recover lost revenues. A month’s subscription to any of the many streaming services costs roughly the price of a regular movie ticket. Facing the tradeoff between streaming thousands of titles at home and a single-movie big-screen experience (the price doubles, of course, if one splurges for the snacks), many consumers have already revealed their preferences for streaming over the big screen, leading to AMC’s massive financial losses over the past four years. AMC has not yet unveiled any plans to prevent arbitrage between the markets for value and premium viewing experiences, wherein people simply buy cheap tickets and sit in the best seats. Viewers must join Stubs’ free tier to access the discount, adding credibility to the critique that AMC is only implementing Sightline to make investors happy with increased Stubs membership, especially without some mechanism to prevent arbitrage. If cheap front-row tickets bring people back to the theaters, let them come. The market will reveal whether AMC is in its final showing or ready for a remaster.

The post Big Screen Price Discrimination was first published by the American Institute for Economic Research (AIER), and is republished here with permission. Please support their efforts.

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