Question

1. Due to the pandemic, the demand for movies in cinemas has fallen. AMC and Cinemark must both close half of their theaters in Lewis and Corinth counties over the next month.

a. Why would it be less profitable for both to close half the theaters in both counties versus one closing Lewis county theaters and the other closing Corinth county theaters?

b. Model a simultaneous game in which AMC and Cinemark choose either Lewis or Corinth to close. What is the equilibrium of this game?

c. What is the equilibrium if AMC was able to make a theater closure decision before Cinemark?

d. You are an economist hired to advise AMC on which theaters to close. Should you ask for time to all the theater traffic data or ask them to announce theater closures today?

Answer 1

a. AMC and Cinemark are both competitors and hence if each of them had to close half of its theatres in both counties than the theatres customers would be distributed across both in both counties such that revenue would be low and uncertain whereas if each of them had to close half of its theatres in only 1 counties- then both of them would have greater control over theatre customers ensuring higher and more certain revenue.

On the other hand, operating cost of AMC and Cinemark would also be lesser if both of them had to close half of its theatres in only 1 county compared to the case where both had to close half of its theatres in both counties. As a result, profit would be less for both if both closes half the theatres in both counties than if one of the closes in 1 county and other one in another country.

b. Table 1 below displays the possible profit payoffs for AMC and Cinemark in the simultaneous decision game of choosing to close theatres in Dallas or Tarrant. We are assuming Dallas and Cinemark are equal.

Table 1

		Cinemark Profit
		Close Dallas	Close Tarrant
AMC Profit	Close Dallas	(1, 1)	(2, 2)
Close Tarrant	(2, 2)	(1, 1)

If Cinemark chooses to close theatres in Dallas, then AMC is better off in deciding to close theatres in Tarrant and vice-versa. Hence, there are 2 equilibrium in this game- first: AMC closing Tarrant and Cinemark closing Dallas theatres and second: AMC closing Dallas and Cinemark closing Tarrant theatres.

c. If AMC was able to theatre closure decision before Cinemark, then equilibrium in this game would also remain same as earlier if AMC choose to close Dallas, then Cinemark would be better off in closing Tarrant and if AMC choose to close Tarrant, then Cinemark would be better off in closing Dallas.

d. If I am hired as an economist to advise AMC on deciding which theatre to close, then I would ask for time to consider theatre traffic data instead of suggesting to close theatre immediately as it would be more profitable for AMC to close theatres where theatre traffic is comparatively low.