The Economics of Storytelling: Movies

When many people think of the movie industry they think of the glitz and glamour of Hollywood, but the movie industry is so much more. Movies are produced all over world. From Hollywood to Bollywood and each movie has its own style and flare. What I mean to look at in part three of my blog series is the different market structures that are found all over the world which help bring storytelling to the screen. What market structure a business belongs to is determined by their characteristics and how easily a business can enter the market.

Let us first look at a perfectly competitive market, if the movie industry in the USA belongs to that market structure, and the consequences if it did. This type of market has the following characteristics:

• Many buyers and sellers: Well our current movie industry has millions of viewers across the globe and there are a lot of movie producers (Warner bros. And Disney as examples)
• All Firms Sell Identical Goods: In this respect I think the movie industry is lucky it doesn't satisfy this aspect of a perfectly competitive market. Imagine if all of the movie studios produced identical movies about hobbits and elves. I love Lord of The Rings, but even that would be pushing it.
• Buyers and Sellers have relevant information: Well technically this can be debated. Some would say that trailers and the movie info count, but I've seen many a movie where the trailer had nothing to do with the movie. So I'm going to have to say that the Movie Industry does not fall under that category.
• Firms have easy entry and exits: Not really. It is really hard to get a movie studio up and running to the point where it is nationally recognized, and once a movie studio is in the spotlight, it may be a wee bit tough to suddenly say that they are no longer producing movies (see the corporation bit in the blog before).
• Price Takers (sellers in the market) sell the product at the equilibrium price: Well actually this is pretty much the case if you look at the price of movie tickets which are similar almost everywhere you go. Movie theatres cannot raise the price for a particular movie, or customers will just go see something else, but they really have no reason to lower the price for a certain movie if they don't have to. However if you look at DVD and VHS sales, the cost may be debatable for different movies. Some DVD sellers will sell DVD's for less for the equilibrium price as long as members keep buying a lot of DVD's at the equilibrium price, and some movie's prices may be debatable on whether it is not at equilibrium price.

Now it is time to decide whether the Movie Industry fits the characteristics of a perfectly competitive market. My final evaluation is that the Movie industry is not a perfectly competitive market, but it's pretty close. Technically if a market has price takers, then it is perfectly competitive, but for the movie industry that can be debated. Now lets assume that the Movie industry is perfectly competitive, could the industry end someday. Since perfectly co competitive markets are easy to get into, if too many new studios entered the movie-making world there may be a surplus of movies and the price of movies would fall until no new movie studios can see the profit of entering the business. Lucky (or unlucky depending on how you look at it) for the movie industry, getting into the industry can be pretty tough, and thanks to the diversity of movies, it will probably be a while before the industry goes down. Another way for the movie industry to be hurt is if the government implemented a heavy tax on profits of the industry making entry pointless, but luckily this has yet to be the case in the USA.

Moving on we shall see if the Movie Industry can be considered a Monopolistic Market which would mean it would contain the following:

• One Seller: Unless you believe in a huge conspiracy theory about the corporations of today, then it is safe to say that this is not the case. In fact the Movie industry is known for the many studios around the world.
• The Single Seller sells a product with no close substitutes: This is not the case in our movie industry today at all. There are all sorts of movies, and if movie prices get too high there are TV shows and Theatre productions to substitute for them.
• The Barriers to Entry (the higher the harder to get in) are high: Well with the internet nowadays one could argue that this is not the case since all you need is a camera, computer and a registration to YouTube (www.youtube.com) or ifilm (www.ifilm.com) to enter the market. Yet to really get into the bigtime movie business (having the movie playing at a cinema) the barriers are pretty high so this is a debatable statement.

With 1/3 (well reality .5/3) matches, I think that it is safe to say that our Movie Industry in the USA is not a monopolistic market.

Although the Movie Industry itself is not a monopoly, in some places certain movie theatres can hold a monopoly. This usually takes place when a movie theatre is the only one in a pretty large area, so the choices are very few. These monopolistic theatres often have price searchers instead of price takers. The difference between the two is that while price takers can only charge one price for the tickets to the movie and concession stand, price searchers can charge a variety of prices. This doesn't mean that they have unlimited price options. The monopolistic theatre will sell its tickets and drinks for as high as it can, but that doesn't guarantee that it will make enough to earn a profit. Sometimes businesses are kept at monopolistic markets through a public franchise, but with theatres this is rarely the case. Now say if a theatre wanted to have a natural monopoly and it had very low costs (say it had bought the building and all of the screens so it didn't need to pay off the money for a new theatre and the owner won a contest for a lifelong supply of popcorn for her company (it could happen)), it could lower its prices until the other competing company was run out of business.

Now in the wonderful USA the government has put several laws into effect called anti -trust laws which limit the power of monopolies. These laws include the Sherman Anti-Trust Act, the Federal Trade commission Act and The Robinson-Patman Act to name a few. To regulate natural monopolies (like the free-popcorn owner discussed earlier) the government guarantees it a certain rate of profit so that it has no incentive to hold down its costs.

Blending the previous two market structures we come to a monopolistic competitive market and whether or not it applies to the Movie Industry today will be decided on by the following:

• Lots of Buyers and Sellers: As concluded before, this is definitely the case with the movie industry.
• Firms produce and sell slightly differentiated products: Well this is certainly the case because movie studios all produce movies and occasionally moichendice (thank you yogurt from spaceballs), but each movie is slightly different whether it covers pirates, hobbits, boxers, or producers.
• Firms have easy entry in and out of the Industry: Well this is the big debatable one. It matters on what is considered a movie studio and whether or not internet movies count.

Well with 2-3/3 (depending on the opinions concerning the third bullet point) I think that it is pretty safe to say that the movie industry of today is a monopolistic competitive market. Although the market is competitive in this market however, the market tends to use price searchers, not price takers. This is because even if they raise the price of their good, some people will still buy it. This is often the case with DVD sales, while theatre prices often remain at equilibrium.

Moving on, we shall examine an oligopolistic market which may be another competitor for what the movie industry may be. Well let the characteristics begin:

• It has Few Seller: Debatable if internet movies are included, but if only movie studios who get their movies onto the big screen are included then yes, it fits.
• Firms Sell Identical or Only Slightly Different Products: Although the movie industry all sells movies, the types of movies which are sold are so different and unique that identical products seems to be an incorrect statement.
• The Barriers To Entry Are Significant: As mentioned before this is very debatable.

In the end whether or not the movie industry falls under this category is debatable, at the most. However just like the monopolistic markets of yore this market does contain price searchers which often fit for DVD sales in the movie industry. Now if the movie industry was a oligopolistic market, then in order to reduce competition between the major movie studios the CEO's could meet together to agree to reduce competition by only producing 2 new action flicks a year and only one hobbit film per studio. This would form a cartel agreement. In the end, though, this might decrease sales for movies overall, since variety is one of the things that moviegoers prize.

In the end I think that the market that most applies to the Movie Industry today is the Monopolistic competitive Market, with the most matches.

Now looking at price discrimination in the movie industry, this usually occurs in situations where selling the movie, or movie tickets for a lower price would benefit the movie company. This can also often occur when the item being sold can not easily be resold.

• Often times a movie theatre will charge children less than adults, this is because a kid is probably not going to buy 10 movie tickets and then sell them outside for 7 bucks. However for the Lord of The Rings 3-movie sitting show, the tickets were $30 regardless of age because a kid could resell them for quite a nice profit, if he/she got a reasonable discount.

Well that's all for now. Stay tuned though, I plan to try something new using chapter 8. We'll see how it turns out....