Ever been to the cinema and found it almost empty? And then wondered why you paid the full price? Perhaps you’ve taken advantage of Orange Wednesday or only go if there’s a particularly good film on? Often it might be cheaper to wait until the film is out on DVD!
Going to the cinema can be an expensive outing. The ticket, the popcorm, a drink, ice cream – it all adds up! Orange Wednesday has recently disappeared and this will definitely have an impact on consumption of movies at your local Odeon, Vue or Showcase. The impact will be on how many seats are left empty.
However, a new app could be set to generate revenues for the cinema and provide cheaper entertainment for your everyday consumer. This new app will allow cinemas to send out alerts to people in the local area advising them that a screening will have many empty seats. What’s the incentive? Perhaps a discount, or some food. But, why would they do such a thing?
If a movie is being shown at a cinema, there will be a large fixed cost. However, what happens as each additional consumer enters the theatre? Does the cost to the cinema rise? Perhaps there is a small cost with more cleaning required, but the additional cost of actually showing the film if there 11 rather than 10 people is almost (if not equal to) zero. That is, the marginal cost of an extra user is zero. Therefore, if there is a screening with many empty seats, wouldn’t the cinema be better to offer the seats for half price. After all, if you can earn £5 from selling a ticket and the additional cost is almost zero, then it’s better to sell it for £5 than not sell it for £10! The following article and video from BBC News considers this new app and other strategies to maximise cinema usage!
Apps in pockets, bums on cinema seats BBC News, Dave Lee (27/2/15)
Questions
- What would the budget constraint look like for a cinema where a discount was offered if you purchased two cinema tickets and then received the third ticket for half price?
- Why is the marginal cost of an extra user at the cinema almost zero?
- If the MC = 0, does this mean that a cinema is a public good?
- How will this new app allow a cinema to increase total revenue and profit?
- If it is cheaper to buy a DVD rather than go to a cinema, why do people still go to the cinema?
Economics is about choices. But how can people be persuaded to make healthy choices, or socially responsible or environmentally friendly choices? Behavioural economists have studied how people can be ‘nudged’ into changing their behaviour. One version of nudge theory is ‘fun theory’. This studies how people can be persuaded into doing desirable things by making it fun to do so.
I came across the first video below a couple of days ago. It looks at a highly successful experiment at the Odenplan underground station in Stockholm to persuade people to make the healthy choice of using the stairs rather than the escalator. It made doing so fun. The stairs were turned into a musical keyboard, complete with sound. Each stair plays a piano note corresponding to its piano key each time someone treads on it. As you go up the stairs you play an ascending scale.
After installing the musical staircase, 66% more people than normal chose the stairs over the escalator.
The fun theory initiative is sponsored by Volkswagen. The Fun Theory website is ‘dedicated to the thought that something as simple as fun is the easiest way to change people’s behaviour for the better. Be it for yourself, for the environment, or for something entirely different, the only thing that matters is that it’s change for the better.’
VW held a competition in 2009 to encourage people to invent fun products designed to change people’s behaviour. There were over 700 entries and you can see them listed on the site. The 13 finalists included the musical staircase, traffic lights with quiz questions on the red, a Connect Four beer crate, fun tram tickets (giving entry to an instant-win lottery), a pinball exercise machine, a speed camera lottery where a winner is chosen from those abiding by the speed limit, a jukebox rubbish bin (which plays when people add rubbish), a one-armed vending machine, a fun doormat, car safety belts linked to a car’s entertainment system, car safety belt with a gaming screen which turns on when buckled, a bottle bank arcade system and the world’s deepest bin (or at least one which sounds as if it is). The winner was the speed camera lottery.
The fun theory site
Thefuntheory.com
Fun theory videos
Piano Staircase – Odenplan, Stockholm (on Vimeo)
The Speed Camera Lottery (on VIMP.com, Kevin Richardson)
Garbage Jukebox (on YouTube)
The World’s Deepest Bin (on Vimeo)
Bottle Bank Arcade (on YouTube)
Questions
- Does fun theory rely on rational choices?
- Other than through having fun, how else may people be nudged into changing their behaviour?
- Go through some of the entries to the Fun Theory Award and choose three that you particularly like. Explain why.
- Invent your own fun theory product. You might do this by discussing it groups and perhaps having a group competition.
The typical UK high street is changing. Some analysts have been arguing for some time that high streets are dying, with shops unable to face the competition from large supermarkets and out-of-town malls. But it’s not all bad news for the high street: while some types of shop are disappearing, others are growing in number.
Part of the reason for this is the rise in online shopping; part is the longer-term effects of the recession. One consequence of this has been a shift in demand from large supermarkets (see the blog, Supermarket wars: a pricing race to the bottom). Many people are using local shops more, especially the deep discounters, but also the convenience stores of the big supermarket chains, such as Tesco Express and Sainsbury’s Local. Increasingly such stores are opening in shops and pubs that have closed down. As The Guardian article states:
The major supermarket chains are racing to open high street outlets as shoppers move away from the big weekly trek to out-of-town supermarkets to buying little, local and often.
Some types of shop are disappearing, such as video rental stores, photographic stores and travel agents. But other types of businesses are on the increase. In addition to convenience stores, these include cafés, coffee shops, bars, restaurants and takeaways; betting shops, gyms, hairdressers, phone shops and tattoo parlours. It seems that people are increasingly seeing their high streets as social places.
Then, reflecting the widening gap between rich and poor and the general desire of people to make their money go further, there has been a phenomenal rise in charity shops and discount stores, such as Poundland and Poundworld.
So what is the explanation? Part of it is a change in tastes and fashions, often reflecting changes in technology, such as the rise in the Internet, digital media, digital photography and smart phones. Part of it is a reflection of changes in incomes and income distribution. Part of it is a rise in highly competitive businesses, which challenge the previous incumbents.
But despite the health of some high streets, many others continue to struggle and the total number of high street stores across the UK is still declining.
What is clear is that the high street is likely to see many more changes. Some may die altogether, but others are likely to thrive if new businesses are sufficiently attracted to them or existing ones adapt to the changing market.
How the rise of tattoo parlours shows changing face of Britain’s high streets The Guardian, Zoe Wood and Sarah Butler (7/10/14)
The changing face of the British High Street: Tattoo parlours and convenience stores up, but video rental shops and travel agents down Mail Online, Dan Bloom (8/10/14)
High Street footfall struggles in August Fresh Business Thinking, Jonathan Davies (15/9/14)
Ghost town Britain: Internet shopping boom sees 16 high street stores close every day Mail Online, Sean Poulter (8/10/14)
Questions
- Which of the types of high street store are likely to have a high income elasticity of demand? How will this affect their future?
- What factors other than the types of shops and other businesses affect the viability of high streets?
- What advice would you give your local council if it was keen for high streets in its area to thrive?
- Why are many large superstores suffering a decline in sales? Are these causes likely to be temporary or long term?
- How are technological developments affecting high street sales?
- What significant changes in tastes/fashions are affecting the high street?
- Are you optimistic or pessimistic about the future of high streets? Explain.
The Scottish debate revolved around a variety of issues and one of the key factors that added weight to the ‘No’ campaign was the idea of being British. But the concept of ‘Britishness’ is not just important to those who live here. It still appears to be a key signal of quality in foreign markets and it is something which foreign consumers are willing to pay a price for.
Barclays Corporate Banking has undertaken research into eight key export markets to determine the value of ‘Britain’. One of the key factors that boost demand for a product is quality and another is the idea of a brand. As quality improves and brands become more recognized, a product’s demand curve will begin to shift to the right, thus pushing up the market price. In other words, with higher quality and brand recognition, an individual’s willingness to pay rises. One brand that foreign consumers seem willing to pay a premium to purchase are those labelled ‘Made in Britain’.
The research indicates that 31% of customers in emerging markets have been prepared to and have purchased products that are from Britain, despite the higher price. Seeing the label ‘Made in Britain’ seems to send the signal of quality and this in turn creates a higher willingness to pay. Furthermore, this willingness to pay, while still good for Scottish, English and Welsh products, is higher for ‘British’ products, perhaps another indication of the truth behind the ‘Better together’ campaign.
The increase in willingness to pay between products with seemingly no country of origin and a British country of origin is 7% and this knowledge should give a confidence boost to the British export market. It should also indicate to exporters in Wales, Scotland and England that they are better to advertise as ‘Made in Britain’ than ‘Made in Wales, Scotland or England’. The expected boost from the 8 key emerging markets is around £2bn. The following articles consider the concept of ‘Brand Britain’.
Good news for exports as Brand Britain is revealed to be valuable concept Small Business, John Bromley (3/11/14)
Britain ‘best brand’ for Welsh exports, survey suggests BBC News (26/11/11)
Overseas consumers 64% more willing to pay premium for ‘Brand Britain’ Marketing Week, Sebastian Joseph (3/11/14)
Report flags up ‘British’ benefit The Courier, James Williamson (3/10/14)
Questions
- Using a diagram, illustrate the effect of a product’s being a well-known brand on its equilibrium price and quantity.
- Why is it that the relative willingness to pay a premium for British products is higher in developing countries than in developed countries?
- Using the concept of marginal utility theory, explain the impact of the ‘Made in Britain’ label.
- The BBC News article suggests, however, that some Welsh companies have not found the brand effect to be the case. What factors might explain this?
- To what extent are the concepts of consumer and producer surplus relevant here?
Merlin Entertainments PLC is one of the largest operator of visitor attractions in the world and owns over a third of the most popular theme parks in Europe. It runs the four most visited parks in England – Alton Towers, Legoland Windsor, Thorpe Park and Chessington World of Adventures as well as the most popular theme park in Italy – Gardaland. Alton Towers alone had 2.5 million visitors in 2013. Anybody thinking of going to one of these attractions is faced with a wide range of different entry fees .
Theme parks and tourist attractions have market power so their owners have to make some interesting pricing decisions. They have to tackle the same dilemma that confronts any seller that faces a downward sloping demand curve for its goods/services.
One option for the firm would be to increase the entry fee. This would produce higher profits per visitor as some of the surplus from the transaction previously enjoyed by the consumer will be extracted by the seller and converted into producer surplus. Unfortunately for the business the higher price, all other things equal, will also result in fewer visitors. Some people will be deterred from visiting because of the higher price and the seller will lose out on potential revenue.
An alternative strategy would be for the theme park to reduce its entry fee. All other things equal, this will increase the number of visitors. However, it would also mean that the profit per customer would fall. The frustrating issue for the seller is that some of its customers, who would still have visited the attraction at the higher price, are now able to get a better deal.
This dilemma exists if the seller has to charge all of its different customers the same entry fee. If it could charge a higher entry fee to those customers who would be willing to pay more and a lower entry fee to those who would be willing to pay less then it could make more money. Extra revenue could be obtained from those additional sales that take place at the lower price while more consumer surplus could be extracted from those still paying the higher price.
Is it possible for a firm to charge different prices to different customers for the same or a similar good or service? Table 1 below shows the entry fees for Warwick Castle, another tourist attraction owned by Merlin Entertainments PLC.
It can immediately be seen from this table that some groups of customers pay a different entry fee from others. For example adults have to pay £24 to enter on the day while people aged 60 and over pay a lower price £16.80. The entry fee for children aged between 4 and 11 is £21.00 while those aged 3 and under go for free. Students aged 16-18 can gain entry for a price of £13.50 if they can provide valid ID and purchase the tickets from the visitbritainshop website.
In this example, the company has allocated people into different categories by age (i.e. senior, adult, student, older children and younger children) and has set the entry fee that customers in each group have to pay.
The table also shows that if customers purchase on- line then they can get the tickets more cheaply. The entry fee for each category is 25% lower if the ticket is booked seven days in advance i.e. the prices shown in the last column in the table. If the booking is made between 2-6 days in advance then the discount is only 10% i.e. an adult ticket would cost £21.60. The on-line discounts are open to everyone. People are given the choice to either book on-line in advance or pay on the day. This is different from a situation where you are placed into a category by the firm. For example the customer cannot choose whether they are over 60!
If people are prepared to spend more time searching on the internet then other cheaper prices can also be obtained. Once again these offers are open to anyone willing to spend the time and effort in order to find them.
All the ticket prices above give people access to exactly the same attractions on the day. They do not give the visitor access to two of the attractions at the castle – the Dragon Tower and Castle Dungeon. Entry to the Dragon Tower would cost an adult on the day an extra £1.80 while entry to the Castle Dungeon would cost an extra £5.40.
Warwick Castle Ticket Prices Warwick Castle (accessed on 04/09/14)
Alton Towers Alton Towers (accessed on 08/09/14)
Warwick Castle Tickets visitbritainshop (accessed on 02/09/14)
Global Attractions Attendance Report teaconnect (accessed on 05/09/14)
Merlin Entertainments Merlin Entertainments (accessed on 08/09/14)
Questions
- What pricing decisions do firms have to make if they operate in a perfectly competitive market?
- Explain why an individual tourist attraction will have a downward sloping demand curve
- Paying an entry fee and an extra payment per attraction is known as what type of pricing? What advantages does this type of price strategy have for the seller?
- How would you calculate the profit per customer? What factors other than the entrance fee would determine the profit made per customer in a theme park or tourist attractions?
- Paying a different price depending on which category you have been assigned to by the seller is known as what type of pricing strategy? Can this type of pricing strategy ever be in the interests of society?
- In the example used in the case, customers are assigned to different categories by age. Can you think of any other ways that firms could categorise their customers?
- Given the category customers have been assigned to they can pay different prices depending on whether they buy the tickets on line. What is the price strategy called when customers can choose from a variety of pricing options for the same or similar product? Can you think of any different methods that could be used by the seller to carry out this type of pricing strategy?
