Given that I recently posted on the high price of popcorn in movie theatres it is interesting to note the affect of competition law on the price of movie tickets. This example is from the US were up until the late 1940s the major movie studios all owned chains of theatres. In the 1940s the studios made their theatres charge customary admission prices and placed restrictions on the showing of their movies in non-owned theatres. As a result the US Department of Justice took the studios to court for monopoly price fixing. McKenize (2008: 93) describes the outcome as
After a series of lower court decisions, the studios were required by the U.S. Supreme Court in 1948 in the United States v. Paramount to divest themselves of their theater chains. The presumption underlying the ruling was that divestiture would lead to greater competition in the theater market and lower ticket prices. However, the exact opposite occurred: In the two decades following the divestiture decision, movie ticket prices rose substantially relative to the general price level. To be exact, between 1948 and 1958, movie ticket prices rose by more than 36% (despite the incentive theaters had to try to substitute concession revenues for ticket revenues), while the consumer price index (CPI) rose by only 20%. Between 1958 and 1968, movie ticket prices rose by almost 69%, while the CPI rose by between 15 and 16%. In short, the Paramount decision probably increased industry costs that showed up in ticket prices that spiraled upward.So the government's efforts only manged to achieve the very thing it set out to prevent.
- McKenzie, Richard B. (2008). Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles. New York: Copernicus Books.
2 comments:
I'm skeptical about this explanation. What's the old saying about the vertical monopolist: he can only take his profits once? I don't know if that result holds in oligopoly.
What is McKenzie's theory for why post separation prices went up? Vertical diseconomies of separation? It's hard to see where those economies would come from. Furthermore, since studios have not really integrated back into theatres I do wonder if something else drove up those prices.
If vertical economies are unimportant, an interesting question is why studios ever owned theatres in the first place. I have no idea, but I wonder if it was because theatre quality mattered to studios much more back then and it was hard to write and enforce contracts that set minimum theatre quality in all the dimensions they can vary.
I wonder if an alternative explanation for higher cinema prices was film quality, which seemed to take off in the 1950s. It isn't hard to imagine studios demanding an ever higher share of receipts for Ben-Hur and Cleopatra.
Matt. The reason for vertical integration is that its cheaper than using the market. The transaction costs of using the market are such that having both the upstream and downstream firms as part of the same organisation is cheaper, it does away with hold-up problems etc. If this is so then forcing the studios to divest themselves of their theater chains can only increase costs.
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