Movie theaters should jack up prices on Thanksgiving weekend, but they won’t by Chris Matthews @FortuneMagazine November 25, 2014, 9:21 AM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Retailers aren’t the only ones preparing for a rush of business this holiday season. The Thanksgiving and Christmas holidays are a busy time for the movie business too, with average weekly attendance over Thanksgiving weekend spiking, followed by an even more pronounced surge in attendance during Christmas. But unlike, say, the airline industry, movie theaters don’t take advantage of this surge in demand by charging its customers more. A 2007 paper published by Barak Orbach and Liran Einav argues that “anecdotal evidence indeed indicates that variable pricing could increase revenues” for theaters. They point to studies conducted in the 1970s showed that lowering prices during weekdays increased box office revenues and concession sales. Theater owners overseas have also had success by discounting tickets during slow periods or charging premiums for big blockbuster movies like Jurassic Park. But despite this evidence, and the sound economic theory that supports changing prices to reflect waxing and waning demand, theaters in America more or less charge the same price for a ticket regardless of the how popular the movie is or when it is playing. Orbach and Einav explain that this wasn’t always the case. There was widespread use of variable pricing in the industry from the 1910s until the 1950s, and the practice continued in some theaters up until the early 1970s. According to Orbach and Einav, film distributors, which often owned major stakes in the most popular movie theaters, devised a system in which everyone benefitted from variable pricing: Theaters were classified according to their affiliation, luxuriousness, age, and location. Based on this classification, a “run-clearance-zone” system was established. In any defined geographic location, a given movie played at one theater, and another theater within the same zone could show the same movie only after a defined period lapsed. Distributors also graded movies as A, B, or C depending on their budgets and the popularity of leading actors. Admission prices for A movies were greater than B, while B movies cost more than the C variety. These practices created a system where ticket prices varied depending on when and where movies played and how much it cost to make them. This system began to unravel in the late 1940s, when a recession and the advent of television dealt a huge blow to the movie production industry. “Adjusted to 2002 dollars, box office receipts, which hit a record of $15.6 billion in 1946, bottomed out at just $5.5 billion in 1964, and then gradually climbed to $9.5 billion in 2002,” write Orbach and Einav. The business reacted to this sea change by cutting back on the supply of movies—mostly by eliminating lower-priced B and C movies. In addition, the famous Paramount anti-trust case of 1948 broke up the system that gave movie distributors an interest in the variable pricing scheme. That case was supposed to dismantle the cozy relationship between movie theaters and distributors, but even today “most theaters are informally affiliated with specific major distributors,” write Orbach and Einav. They find that the Paramount case and state laws aimed at “creating a competitive bidding market in which theaters have access to all distributors” have failed. And the benefits of the system that eventually emerged accrued to movie studios and distributors, rather than the theaters themselves. Theaters make most of their profits from concessions and would benefit from a pricing scheme that kept their houses full no matter the time of day or year. The reliance on uniform pricing has had some unintended ethical consequences, too. For instance, this weekend, The New York Times ethicist column dealt with a reader who liked purchasing (at a movie theater with reserved seating) an extra seat next to him so that he could enjoy the additional space. The ethicist frowned on this practice, writing: If you buy an extra ticket for a movie playing in a theater that’s only half full, you’re actually being more morally conscientious than necessary. Most of the time, finding an empty third seat is not that difficult — but by paying for a third ticket, you are admitting your intentions up front and ensuring that you won’t extract more from this experience than you invested. That’s good citizenship. If the theater is full, however, you should never do this…. You are placing your own gratuitous comfort … above a stranger’s ability to merely experience the same film. Under those conditions, the benefit you are taking for yourself is smaller and less meaningful than what you’re taking away from another person. That’s bad citizenship. An economist would look at this question differently. He would argue that it’s impossible for an outsider to say one movie goer’s comfort is less valuable than a stranger’s ability to merely experience the film. What if, for instance, a movie goer is so anthrophobic that he can’t enjoy a movie without a buffer seat next to him? Furthermore, the ethicist argues that it’s actually an example of good citizenship to buy an extra seat, but only when the movie isn’t sold out. But in most situations, a movie goer won’t likely know whether a movie will sell out when he is buying his tickets, especially if he buys his tickets well ahead of the showing. By raising prices during times of high demand and lowering them during times of slack demand, theaters would make it less likely for a patron to buy extra comfort in the form of extra seats. Prices can communicate of all sorts of information, but only when they are allowed to change in the face of shifting supply and demand.