Antitrust and Pricing in the Motion Picture Industry

Summary

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Since the 1970's, at any given movie theater, one price has been charged for all movies, seven days a week, throughout the year. This Article studies the economic and legal causes that led to the formation of this peculiar phenomenon of uniform pricing for differentiated goods. The Article studies the history of the motion picture industry's pricing systems in their legal, economic, and technological contexts. It shows that, despite intensive antitrust scrutiny and litigation, forces with considerable market power have almost always shaped the industry's pricing systems. Uniform pricing, it is argued, is a consequence of the industry's history, structure, and governing legal rules. In particular, the Article argues that the uniform pricing regime has been maintained by the same forces that have always controlled the market. The Article explores the justifications for the uniform pricing regime and concludes that the vertical restraints that perpetuate this regime are the industry's response to the broad 1948 Paramount prohibitions on vertical restraints. The enforcement of uniform pricing is generally less observable than the enforcement of other forms of vertical restraints and has never been challenged by the government or private parties. More generally, the Article illustrates how inefficient pricing systems may form, evolve, and survive in the shadow of antitrust law, even in a high-profile industry such as the motion picture industry.

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Antitrust and Pricing in the Motion Picture Industry

Introduction

At the movie theater's box office, moviegoers face a puzzling phenomenon: Tickets to all movies carry the same price tag seven days a week, throughout the year.2 Most moviegoers do not question this pricing pattern because they were born after it was established in the early 1970s or because they have forgotten that once movie tickets were priced differently.3 Uniform pricing, however, is far from obvious: Sellers normally price their products according to demand elasticities, which vary across products. Box office pricing was not always uniform, but it conformed to this economic principle only during the early days of the industry, from 1896 to 1905.

Uniform prices for differentiated goods are common in many markets. For example, all long-distance calls using the same carrier cost the same, different flavors of ice cream or soda of the same brand carry identical price tags, hosting sports teams normally price particular seats uniformly regardless of the visiting team's popularity,4 and digital music providers charge the same price for all songs.5 Such uniform prices are often explained by regulatory constraints and transactions costs, such as information and menu costs.6 As discussed below, none of these explanations apply to the uniform admission prices of the motion picture industry.

The motion picture industry was born with the twentieth century and has grown into a multi-billion dollar industry.7 From its beginning, the industry has been subject to antitrust actions and scrutiny that, as discussed in this Article, have never succeeded in removing vertical constraints from the price mechanisms of the exhibition segment.

Box office pricing first drew the attention of antitrust agencies in the second quarter of the twentieth century,8 when a few large distributors acquired control over admission prices.9 For twenty years, antitrust actions against these distributors failed to bring competition to the industry, until the 1948 Supreme Court decision in United States v. Paramount Pictures.10 The Paramount Court directly addressed the industry's pricing structure,11 and the decrees that followed prohibited and were designed to prevent distributors' intervention in setting admission prices, among other things.12 This prohibition against distributors' intervention in setting admission prices is still in force.

At the time, Paramount was described as "the Government's greatest economic victory in the sixty year history of antitrust enforcement."13 Over the years, numerous books and articles have addressed the impact of the Paramount decrees on the industry's structure and competitiveness.14 Surprisingly, box office pricing and the convergence of the industry to uniform pricing that followed the Paramount decrees have been neglected in the literature. The development of ticket pricing is interesting because it allows one to examine the impact of antitrust policy on one facet of the price charged to the consumer.

Although the practice of uniform pricing in the movie theater industry has not been studied, several scholars and industry professionals have addressed it in passing. Some of them argue that setting variable admission prices "is too complex an undertaking that could cause confusion in the minds of consumers"15 or raise other arguments against price differentiation.16 Many others point out the advantages of variable pricing.17 Among the latter is Michael Conant, who notes, "[A]dmission prices for films that are not hits and that leave theaters largely empty do not result in admission-price cutting. [EJxhibitors generally consider demand to be relatively inelastic. The question is whether they have tested this hypothesis with price changes for films of different quality."18

This Article fills the gap in the literature on movie theater pricing. It demonstrates how, despite extensive scrutiny and litigation in the motion picture industry, a few powerful players in the upstream market-the distribution segment-have always controlled the structure of box office pricing. These findings emphasize the ineffectiveness of antitrust enforcement in the motion picture industry, as the typ...

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