The Karnataka government passed an order on May 2, 2017 capping prices of movie tickets at Rs 200, based on the proposal made in the 2017 budget. A lot of Bengalureans whine about the exorbitant prices of movie tickets in multiplexes, and were happy with this move.

Prices of movies tickets were quite high in Bengaluru, sometimes reaching 700-800 rupees for a blockbuster release on a weekend. Though, more commonly, one would have to pay Rs 300-400 for a movie ticket in a multiplex. Many people found this unaffordable as they could not make as many visits to the multiplex as they would have wished.

However, it is important to note that the movie halls were still teeming with people despite the high prices, which meant that there were people who valued movie tickets at that price point.

How do you allocate seats?

The question from an economics perspective is about allocation of the scarce resources. Think of a scenario when there is a summer blockbuster releasing, say Bahubali: The Conclusion, where demand for movie tickets will surely be higher than the supply of seats in theatres. What is the best method to allocate the limited seats to the consumers who demand it?

One way is to have variable pricing depending on demand and supply. Multiplex owners would charge a high price at the beginning, say Rs 400. Only those who truly value it at that price will end up paying for it and watching the movie. Others, who value it lesser, like me, would wait for the third or fourth week for the prices to drop and would then watch it. A few others would wait for the DVD release or for the movie to be available online.

Sure, there would be a bit of disappointment and unhappiness for a few who would have to delay their movie experience and for others who would not be able to afford going to the multiplex at all.

Another alternative is to have a price cap at Rs 200. Now, irrespective of people’s different valuation, everyone would try to purchase the ticket and the allocation would be based on first come, first serve basis and will turn it into a lottery. Thus, quite a few people who were willing to pay a higher price will end up without a ticket. Which of the two systems produce fairer outcomes – people unhappy about not being able to watch Bahubali because they can’t afford it or people unhappy about missing Bahubali because they could not get a ticket despite their willingness to pay?

Unintended consequences

Let us, for a moment, imagine that the number of people who did not get a ticket and thus, were unhappy is the same in both the scenarios. Does that mean that the government move is purely a redistribution of unhappiness and everything else remains the same? Does the sum of happiness in the society remain the same? Unfortunately, the answer is an overwhelming no. A price cap always has other unintended consequences.

Multiplex owners are now definitely unhappier than before due to reduced revenue. The business model of cinema halls depend on selling the maximum number of seats for each show at the highest price possible in order to maximise revenue. Revenue is dependent on price and quantity and theatre owners try to maximise both. For an offbeat indie movie, they would charge a lower price in order to fill up the seats (maximise quantity) and for a blockbuster, they would charge a higher price. With a price cap, however, the option of tinkering with the price is no longer available to them and thus, they would have to maximise only the tickets sold and ensure that each seat for every show is sold out.

To ensure this however, they would have to change the movies they decide to screen. Multiplexes may start screening only those movies that guarantee them a full house. These, typically, are those that either have big stars or are made by established directors and film crew. This, in turn, will prompt production houses to fund only those movies that have a popular cast and a time-tested story line.

All of this will severely impact upcoming actors and directors who want to try something new, thereby stifling the growth of creative and experimental cinema. It will also negatively impact moviegoers, who will now have lesser films to choose from.

Black tickets and costly popcorn

Touts selling movie tickets in ‘black’ were almost a thing of the past with the advent of multiplexes, online booking and dynamic pricing. That might change though with the price cap. The temptation of snapping up tickets as soon as the booking window opens and then, selling it at a higher price would be far too tempting. Multiplexes themselves might collude with modern day touts. This would make getting tickets much harder than before.

Once you enter into a multiplex, they have a virtual monopoly on all the complementary goods they sell. Popcorn and Cola are priced multiple times more than the normal rates outside. Parking in multiplexes is ridiculously high as it is. The prediction is that all of this will only get much more expensive with a price cap. Multiplex owners will look at other avenues to compensate for the lost revenue and these complementary goods will be the first target.

In Chennai, where there is a similar price cap on movie tickets for the past 10 years showcases exactly this. Parking rates in multiplexes are one of the highest in metro cities. The popcorn + cola combo offer costs significantly higher than the movie ticket itself. Online booking charges and “convenience fees” would drastically increase as well.

Price differentiation exists based not only the movies screened but also on show timings for the same movie. Weekday tickets were generally priced much lower than weekend prices, for example. Morning shows are cheaper than evening shows. By putting a price cap, many multiplex owners will now have a de facto reference price. A weekday morning show which would cost Rs 120 will now be priced at the capped price of Rs 200. An article in India Today reported exactly this earlier this month.

The Karnataka government has not put a price cap on ‘premium’ tickets, ie Gold Class and the like. The High Court recently exempted price caps on weekend shows. Expectedly, the price for these exempted categories have skyrocketed. The same article in India Today reported: “…a seat under the category ‘royal seat’ was available for Rs 120 and Rs 250 during weekdays/weekends respectively. But after the ruling, the prices go up to Rs 680 as the order allows flexible pricing on weekends”.

Run down multiplexes and lost tax revenue

Not all multiplexes will be able to cover their lost revenues. Those who are not ingenuous enough will have to cut costs elsewhere and the first casualty of this would be maintenance. The very attraction of multiplexes is the well-maintained and swanky interiors with good amenities. If multiplexes cannot cover their costs, customers will have to bear stinking toilets, reduced security, fewer attendants, and badly maintained interiors. Worse, multiplexes will start shutting down and will give way to more profitable businesses.

The government also stands to lose. As a report in The New Indian Express points out, “During 2016-17, the total entertainment tax generated by Karnataka was Rs 84.62 crores. Similarly, the entertainment tax generated by Tamil Nadu, Andhra Pradesh, Telangana, where the ticket price was regulated for many years, was Rs 13.66 crores, Rs 14.50 crores and Rs 26.01 crores, respectively”. Surely that tax money can be used for pressing issues in the state?

In comparison, in Kerala, where there is a flat entertainment tax, flexible ticket pricing and a single window for theatre licensing, there has been an increase of screens from 408 in 2014, to 516 by September 30, 2016.

The bigger question

When should a government intervene in the markets? Traditional economics suggests that it should only be in a situation of market failure, that is, when markets have failed to deliver the maximum amount of utility or value to the largest number of people and crucially, only when there is certitude that the government intervention will improve this situation.

With the price cap, was there a case of market failure that the government was attempting to rectify? Movies, and in the larger case, entertainment is not a case of missing markets, such as public goods; it would also be a stretch of the imagination to classify them as merit goods – watching movies is purely a private benefit, unlike, say health or education, which has positive externalities to the society.

The most common justification for government involvement was that prices were too high for the ordinary consumer. So, was it a case of price gouging – producers charging exorbitant amounts for essential commodities stemming from a concentration of market power? This explanation does not hold water either. There is a reasonable amount of competition in the cinema halls and movies are not essential commodities. Even if one were to argue that there exists a certain amount of concentration of market power, it is a matter for the State Competition Commission to resolve and does not warrant a price cap by the government.

The policy, when laid bare, will reveal to be just another populist move with long ranging unpopular and harmful effects.

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