On Price Caps on Movie Tickets

The Karnataka Budget for 2017–18 has capped the maximum admission fee for all movie theatres in state, including multiplexes at ₹ 200. This is policy that has been rumoured for some time, and has finally been adopted.

Across the Hosur border, Tamil Nadu has had a policy of capping ticket prices for a decade, with the maximum ticket price being set at ₹ 120 all over that state. Compared to that, it may be said that Mr. Siddaramiah has been relatively generous. After all, haven’t we all grumbled at having to cough up several hundred of our well earned Rupees for a single movie ticket?

A sample of quick reactions from Social Media indicates that this is a popular idea across party lines. In these polarized times, when the colour of your politics determines what you think of policy choices, finding an idea that has bipartisan support is rare and welcome.

Clearly, lots of people find the prices they pay to watch movies, especially at multiplexes, too high for their comfort. However, they do end up paying those prices, at least in high enough numbers to keep multiplexes happy. However, there are a large number of people who visit multiplexes fewer times than they otherwise would if prices were lower, and there are people who don’t end up going at all. All of these groups of people would presumably be happy at this price cap.

Movie theatres have a limited and fixed supply of seats, which they need to sell for each show. In Economics jargon, these seats are called “perishable goods”, because their value is strictly time limited. An unsold seat for today’s 6PM show cannot be sold for tomorrow’s 12:00 Noon show, for example. The economics of running a movie theatre, therefore, is all about selling as many seats as possible for each show, for as high a price as possible, to maximize revenue. Since their cost structure is relatively fixed irrespective of the number of tickets sold, an extra Rupee in revenue is almost directly an extra Rupee in profit.

Given less than sufficient demand for tickets, a rational movie theatre owner would ask if by reducing prices by ₹ 1, the increased demand would more than compensate for the loss of revenue in each seat. Conversely, if demand is high, (s)he would consider if the reduced demand caused by increasing the prices by ₹ 1 would more than account for the increased revenue from each ticket. Ideally, prices would be set at the point where the incremental loss or gain of per-ticket revenue from changing prices would be exactly compensated by the corresponding incremental increase or reduction in demand, thus making total revenues maximum. In mathematical terms, using the dreaded calculus, this would be a “stationary point” on the revenue vs. price curve. Outside of Economics textbooks, only a small minority of movie theatre owners would actually think in terms of calculus. However, as many have noted, business owners do have the ability to come up with very good price points with practical methods or “heuristics”, often accounting for more effects than our simple textbook models, and without explicitly resorting to mathematics, just as cricketers seem to manage to catch balls without needing to solve the equations of projectile motion.

As is to be expected, one can see multiplexes charge different prices for different movies, shows, and days, depending on expected demand. As with airlines, we shouldn’t be surprised if there are people paid to come up with just the right price point for each movie, show, and seat.

What happens when a cap on price is set? Economists would say that price caps inevitably lead to shortages. If the cap is set low enough to be of any use (that is, if movie theatres aren’t empty at that price on weekends), then there would be more people willing to pay that price for a seat, than there would be seats available — that is to say, a situation where demand exceeds supply. Without the option of increasing prices to match demand, the movie theatre owner would have to sell tickets to the first people that ask for them in a reasonable time period before each show. This would leave a lot of people unhappy at not having got tickets, though they were willing to pay the required price, or maybe even higher.

Presumably, the intention of this policy is to make unhappy people happier. However, instead of some people being unhappy that they paid too much, or that they are unable to afford as many multiplex visits as they would like, now we would have people unhappy because they were unable to get tickets. Movie theatre owners too, would be less happier than before thanks to reduced revenues. Does it make sense for a government to move unhappiness from one set of citizens to another? No, unless real social benefit can be seen from merely moving unhappiness around. It is hard to find any such benefits in this case.

The bane of all well-intentioned policy decisions are unintended side-effects. There are a few possible unintended effects of this price cap that readily come to mind.

Those of us old enough to remember hanging out outside theatres with “House Full” signs looking for someone to sell us a ticket in “black” at an inflated rate would not really miss that. It was rumoured that movie theatre owners used to deliberately sell tickets in “black” to maximize revenue. With more dynamic ticket pricing, this practice has mostly gone away, especially in multiplexes. With a price cap, both the temptation to sell tickets illegally rather than through box offices would return. Even if all theatre owners were scrupulously honest, the idea of making a quick buck by snapping up tickets right when the booking window opens, and then making a handsome profit by scalping them at higher prices on the day of the show would attract quite a few “entrepreneurs”. Accounting for this, we should expect to find it even harder to buy tickets legally than the previous paragraph would suggest.

Multiplexes have a handy monopoly in selling popcorn, cola, nachos, and other snacks at heavily inflated prices, as anybody who has been to one of them would attest. These are called “complementary goods” to movie tickets. Since the prices of these are not capped, we should expect to see a corresponding rise in the prices of snacks. For example, that large tub of caramel popcorn which this author’s significant other cannot watch a movie without would now be likely to be priced even higher. After all, if someone was willing to pay those prices for snacks, they’d now pay more for them now that they’ve paid less for tickets.

A good multiplex ought to have a good mix of movies in a city like Bengaluru, catering to varied tastes in genres, languages and price points of movies. Being able to charge different prices allows them to run, say, a blockbuster like Bahubali beside regular Hindi/Kannada movies and also niche cult movies. Each one of them would have a different demand to price relationship, and hence would have to be priced differently. That flexibility gone, we should expect multiplexes to prefer movies with large guaranteed viewerships, and allocate more seats to them, rather than charge higher prices for them as they do now. Those of us who prefer movies of the slightly offbeat kind would now find them harder to come by.

Swanky multiplexes do look quite a lot better than the run-down theatres of yesteryear, and why not? It takes quite a bit of money spent to make them look the way they do, and the generally better looking environment encourages higher spending. With price caps, cost cutting will have to be resorted to, and one of the first casualties can be expected to be maintenance. It would be sad to see multiplexes go slowly down the curve of ill-maintenance and general decline in appearance. Setting price caps would tend, ironically, to reduce investment in creating new multiplex capacity as well.

A “natural experiment” regarding this would be to compare Tamil Nadu, which has price caps, to neighbouring Kerala which doesn’t. As this article in the Hindu points out, many of the unintended consequences talked about above do seem to be real. Kerala has seen much higher growth in capacity than Tamil Nadu. Also as expected, Tamil Nadu has higher rates for parking, popcorn and the like. The article also hints at some illegal ticket sales at higher prices, possibly with some connivance from some levels of authority.

With every well-intentioned plan such as this, we must ask if there might be a better way to achieve those intentions without such interventions. Evidently, more people wish to watch movies at multiplexes than they have capacity for, at least on weekends and for popular movies. To reduce prices and get more people into those seats they want to sit in would require an expansion of seats.

It is sometimes pointed out that Kannada movies have lesser capacity to sell tickets at high prices compared to Hindi and English ones, and tend to lose out in competition to them. This again is a symptom of demand exceeding supply. With higher supply of seats, demand for seats for Kannada movies could be fulfilled without price caps.

Thus, it would be better to examine what exactly limits the creation of new capacity. Is it the lack of land available? Is it limited FSI in malls? Is it unpredictable demand for seats? Is it the limited availability of finance? There are possible policy interventions to solve these and other issues that could be holding back the creation of more multiplex capacity. They would take time, and require significant attention, but the end results would be good for all. Addressing those would increase supply, and allow more people to enjoy a movie in their chosen language and environs, while munching on overpriced popcorn (yes dear, I will quit talking about overpriced popcorn now).

Economists get a bad rap these days, but the one law they haven’t repealed is the law of demand and supply. More supply also brings price down, without coercive measures too, and will get more people happier, as opposed to merely moving unhappiness around.

More happiness is what we look for from public policy, is it not?