The Film Industry

Alex Tabarrao's brother Nicholas is guest blogging over at Marginal Revolution. His first post is quite interesting. I recommend it along with the long comments section that follows. Nicholas writes:

One interesting thing that I've always found about the film business from an economic point of view is that unlike in any other business I can think of, the cost of manufacturing the product has no affect on the purchase cost to the consumer. For example Honda can make a cheaper car with less features and cheaper finishes than BMW without losing all of their customers to the superior car because they sell their product for less. You spend less to make something, you charge less for it. Makes complete and obvious sense. Not so in the film business. I am an independent film producer and I make films that typically cost somewhere between $5M and $10M. But when I make, say, an $8M film it has to compete at the same price level as the studios' $80M or $100M film. It costs the consumer the same $12 at the multiplex (and whatever it costs to rent a DVD from Blockbuster these days) for either film. There is no price advantage to the consumer for choosing to see a less expensive film. This naturally makes it terribly difficult for smaller films to find an audience. I find this quite fascinating and I can't readily think of another industry like it.

There are a couple of things to point out here. One is I think he is confusing the idea that production cost is directly correlated with price. It's not. Price is a function of supply a demand, an equilibrium in which cost in various forms is a major variable in ultimately determining that price. Prices, really, are just information. So if costs a lot to make something, he's right, most likely you are going to demand more to compensate for you producing it. But levels of demand and profit models (volume vs margin) have more influence in the long-run.

More practically speaking is how theaters make money. Relatively little profit is earned from ticket sales. Instead concession sales are the real moneymakers. So it makes sense that a theater manager would try and maximize the volume of customers by trading off ticket sale profits for increased concessions revenue.