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• Introduction
• Analyze the market before the COVID-19 pandemic. Describe how the pandemic affected the movie theater industry.
• Explain price discrimination in the movie theater market.
• Movie theater employees are generally paid hourly. Design an incentive pay structure for AMC Theaters and explain how it would work.
Sample Answer
Analysis of the Movie Theater Industry
Before the COVID-19 pandemic, the movie theater industry faced competition from various sources, including streaming services like Netflix and Hulu, and other forms of entertainment. Despite this, the industry was stable, with new blockbusters and a loyal customer base. The average movie ticket price in 2019 was around $9.16, and global box office revenue reached a record $42.5 billion. The market was characterized by major chains like AMC, Regal, and Cinemark, which dominated the landscape, often offering loyalty programs and premium experiences such as IMAX and 3D screens to attract audiences.
The COVID-19 pandemic had a devastating impact on the movie theater industry. Lockdowns and social distancing measures led to the complete shutdown of theaters for extended periods. This forced many studios to delay major film releases or release them directly on streaming platforms, fundamentally altering the traditional release window. This shift accelerated the adoption of at-home viewing and caused a significant decline in box office revenue. For example, in 2020, global box office revenue plummeted by more than 70% from the previous year. The pandemic also led to permanent closures for some independent and smaller theater chains that couldn't withstand the financial strain.
Price Discrimination in the Movie Theater Market
Movie theaters use price discrimination, which is the practice of charging different prices for the same product or service to different customers, to maximize their revenue. This is a common practice in the industry and can be seen in several ways:
First-Degree Price Discrimination (Perfect Price Discrimination): While not perfectly implemented, theaters attempt to get close by offering promotions to specific individuals through loyalty programs, gathering data on their viewing habits and sending targeted discounts.
Second-Degree Price Discrimination: This involves offering different pricing based on the quantity consumed. For example, a larger popcorn and soda combo costs less per ounce than a smaller one. Loyalty programs that offer points for every dollar spent, which can then be redeemed for discounts, also fall into this category.
Third-Degree Price Discrimination: This is the most common type and involves segmenting the market into different groups and charging each group a different price. Examples include: