Some Economics of Movie Exhibition: Increasing Returns and Imax Revenue Premium

Abstract

We strongly reject the hypothesis of theater design revenue neutrality. Instead, we find large increasing returns in revenue from adding auditoria up to 9 auditoria, increasing returns from adding seats up to an intermediate seating capacity of about 120 seats, beyond which decreasing returns prevail, and a large revenue premium to having an Imax auditorium. These revenue gains are largely due to differences in capacity utilization rates, and to a lower extent to differences in screening intensity (more showings per screen), while price differences play a negligible role. We discuss various mechanisms that may rationalize deviations from theater design neutrality. We conclude that a large fraction of theaters have too few auditorium and too many seats per auditorium, although this is less so for recently built theaters. These violations of profit maximization are likely explained by the long term, irreversible, and risky nature of theater design choices.

JEL Classification: D2, L1, L82, Z11