Application Exercise 4l: price discrimination at cinemas
- The cinema operator knows that charging one group of consumers a lower price than another group (i.e. price discrimination) is actually profit maximising. It can easily be applied at cinemas by offering discounts and by separating the two groups of consumers by their capacity to pay as revealed by either their age (e.g. children versus adults) or their working status (e.g. students/non-students/pensioners).
- The cinema operator could achieve this by requiring those with discounted tickets (e.g. students and pensioners) from providing documentation to prove their status as either a student or a pensioner (e.g. the provision of a student card or a pensioner card).
- Cinema operator could ‘suffer’ in terms of additional staff that is required to process an additional 100 people in addition to the larger cleaning bill that could result from the increased patronage.
- The cinema operator could ‘benefit’ in terms of the additional sales of products such as popcorn, ice cream and memorabilia.
- Pricing strategy 4 enabled the cinema operator to extract more of the ‘consumer surplus’ (which is the benefit consumers to derive from paying less then they are prepared to pay). The adults are typically the ones who are more willing and able to pay $15 for a ticket, while pensioners and students are only willing and able to pay $10 for a ticket. By having these two ticket prices the cinema operator is able to force all those people who are prepared to pay only $15 per ticket to pay this price (i.e. they receive no consumer surplus), which yields a total of $3000. It is then able to extract an additional $10 per ticket from students and pensioners ($1000 in total), yielding a total $4000 for each showing. This is $875 more than the next best option of charging a flat $12.50 per ticket (which yielded $3125).
- As mentioned in question 5, ‘consumer surplus’ is the benefit consumers derive from paying less then they are prepared to pay. In contrast, ‘producer surplus’ is the benefit producers derive from receiving more for a product than they would be prepared to sell the product in a market. For example, if the producer is prepared to sell a cinema ticket for $10 and sells it for $15 then the producer surplus is $5. Given that the cinema operator has reduced the consumer surplus as described in question 5 (i.e. by preventing many of those who are prepared to pay $15 from paying less than $15) it necessarily means that the producer must be receiving more than they would be prepared to receive (i.e. the producer was indeed prepared to sell tickets for $10 but is instead receiving $15).