Question

THE CINEMA HOUSE ADJUSTS ITS PRICES

A week after the Galaxy cinema reduced the price of its tickets by 25%, the Maison du cinema replied with a drop-in price for people 25 and under.

"We are making this decision with a view to maintaining our policy of the best prices," says Jacques Foisy, the owner of the independent downtown complex.

Claiming "to want to please Sherbrooke moviegoers", Cineplex Entertainment had lowered the price of its adult biller from $ 9.50 to $ 6.99, last Friday, making its establishment on Boulevard Bertrand-Fabi that of the chain where the ticket is the cheapest in Quebec.

"I would like to know why Cineplex does not want to please other Quebecers, but only Sherbrookers. In The other markets, where the chain is alone, where it has no competition, the prices are rather on the rise, it seems mysterious to me. It looks strangely like dumping, "says Foisy.

                                                                                                The Tribune, 5 juin 2009

1. What type of market does the screening of films in theaters in Sherbrooke correspond to?

2. What type of competition do the Maison du cinema and Cineplex compete with?

3. Explain how Cineplex discriminates against its customers.

Answer 1

Q) a) In an imperfectly competitive market, price discrimination takes place when identical goods or services are sold at different prices from the same provider. A very good example is the price of movie tickets.Prices at one movie theatre may be different for different consumer groups, or locations such as different prices for children, adults and seniors, as the case here. This is computed on the basis of their demand elasticities. This is known as third-degree price discrimination in an imperfectly competitive market i.e. oligopolies and monopolisticaly competitive markets. So, here, in case of Sherbrooke moviegoers , when they go to Cineplex, each of adults or children watch the same movie but pay different prices.

b) Maison du Cinema and Cineplex compete with Galaxy cinema. Now, when Galaxy cinema has reduced the price of its tickets by 25% and based on the information provided, Maison du has reduced the prices for consumers aged 25 years and less and Cineplex has reduced the prices by 26% , but only for adult billers. Price Driscrimination can not take place in perfect competition as there, none of the firms are price makers and all are price takers. However, when there is imperfect competition or monopolistic competition, price discrimination as described above takes place. It implies that the firms need to have some degree of monopoly power and they should be a price-setter, along with some degree of competition among the firms in order to capture maximum market share.

c) In this example, Cineplex discriminates against its customers based on their age and location. They are offering a lower price on the movie tickets for their adult customers based in Sherbrooke. Now, price discrimination is possible for firms only when they are able to recognize the differences in demand elasticities of their customers. The main goal of price discrimination is to make the highest possible revenue from each customer. So, Cineplex will aim to charge price P₁ to its customers with inelastic demand and charges P₂ to customers with elastic demand so as to extract greater total profit. The customers with elastic demand are more likely to move to other alternatives, such as Galaxy or Maison du here, when the aternatives reduce their ticket prices. So, charging the customers with elastic demand a lesser price, in this case, charging the adult customers of Sherbrooke lesser than in other locations where there is no competition, the Cineplex is preventing such customers with elastic demand from going to other theatres and them losing out on market share. The other competitiors in this market are Galaxy and Maison du. And where there is no competition, they dont need to reduce prices and keep the prices relatively high as the customer demand is less elastic there. This is how Cineplex are discriminating against their customers.