cinemas industry created economies.. Cinema theatres earn revenues from three main sources – box office takings, the sale of food, drink and merchandise (concessions) and from advertising. Screening of new releases is often a loss leader, with sales from concessions contributing significantly to revenues in the short run, and to the commercial viability of the theatre in the long run. In the first few weeks of a new screening the majority of box off ticket revenue goes to the distributors and producers. As the run extends the percentage going to the cinema increases. The old adage that ‘cinemas are in the popcorn selling business’ is, in many respects still true.
cinemas industry created economies.. In terms of market structure, the dominance of the ‘big three’ is strong evidence that the industry is oligopolistic and highly concentrated, with a three firm concentration ratio of 71.6%, with Cineworld on 25.5%,Odeon on 23.9%, and Vue with 22.2% (2013). In terms of number of screens, the shares are very similar. Dominance in the market is sustained by extensive barriers to entry, of which the single biggest is the extent of economies of scale.
cinemas industry created economies.. Extensive economies of scale increase the minimum efficient scale for theatres which reduces the ability of smaller independent cinemas to compete with the larger chains. Large chains have the power to obtain the rights to screen first-run films and to do so at a lower average cost per screening. The more screens in the chain, the lower the unit cost of each screening. Similarly, a large chain can re-equip its cinemas with new technology (such as 3-D viewing) at a lower average cost than smaller, independent cinemas. Other technologies may also be shared, such as online booking systems which cover all cinemas in a given territory. Management and administration economies of scale may also be made, with some costs centralized at Head Office. This is certainly the business model favored by many private equity firms. There are also financial and risk bearing economies of scale available to multiplex cinemas, including the ability to raise finance for expansion through acquisitions, and to bear and manage commercial risks more effectively than smaller independent cinemas, or small chains. These factors combine to put large chains at a great advantage in being able to win and maintain market share.
Main sources of revenue for cinemas. Another barrier to entry into the industry is the extent of integration. In terms of horizontal integration, the emergence of the big three is a result of a series of horizontal acquisitions, which has significantly increased the level of concentration in the industry over the last decade. Vertical integration makes it difficult for potential entrants to join – either because the supply chain is not open to them, or because they have no outlets to promote their service. There is a long history of vertical integration in the film industry in general, and particularly between film producers and distributors. Even when vertical integration does not formally exist, the large chains are likely to have very strong relationships with distributors and concessionaries, making it difficult for independent theatres to enter the market, and to obtain rights to screen ‘first run’ films. This is certainly the view of easyCinema founder, Stelios Haji-Ioannou, who told the House of Commons Culture, Media and Sports Committee inquiry into the British film industry, (in 2003) that “The biggest problem I have encountered so far is the refusal of the distributors to deal with us fairly. Some of them refuse to even talk to us.” He added that “I have a feeling that there is a tacit collusion in the industry against easyCinema and the idea of price competition.”
Barriers to entry also cause a reduction in the contestability in the industry, and this is what we would expect to observe in an oligopoly-dominated industry. However, the market is not completely uncontestable as there may be room for a niche cinema in larger towns and cities. For example, independent cinemas still account for around 16% of all screens in the UK (2011). Perhaps the single biggest indicator of oligopoly is the extent to which individual firms can operate independently. Economic theory suggests that firms operating under conditions of oligopoly cannot ‘act alone’ – they must take the potential actions of rivals into account – that is, they operate interdependently.
The significance of interdependence can be seen in terms of how similar pricing ‘rules’ emerge. For example, price discrimination is an accepted strategy adopted by all cinema theatres, with percentage differences between adult and child tickets being almost identical. ‘Cheap Tuesday’ is an example of how discounts can be organized on a ‘rule’ basis. As well as price discriminate multiplex cinemas may adopt a uniform pricing policy for the films they screen, with the latest blockbuster commanding the same price as a less well publicized film. In the USA the practice of ‘uniform pricing’ has come in for particular analysis and criticism in that it does not allow price to reflect changes in market conditions. It would seem that adopting a uniform pricing system within the industry generates an effective pricing ‘rule’ which reduced some of the risks inherent in operating under oligopolistic competition. The existence of such pricing rules means it is unnecessary for chains to make any reference in their promotional materials or their websites to their prices, or to make price comparisons with other chains. This would tend to suggest that cinemas fit neatly into the oligopoly model.
Theory suggests that oligopolists prefer non-price competition and the avoidance of price competition which could lead to risky price wars. Given the need to attract customers, cinemas still need to compete with other chains and with other leisure pursuits, even when pricing ‘rules’ exist. Hence competing on non-price factors such as quality of seating, leg-room, availability of food, the quality of the sound system, free 3-D glasses, car parking facilities and special offers, and competitions appears the accepted method of competition.
Of course, it is difficult to assess whether cinema owners actually collude or not, other than through an implicit understanding of pricing rules. Given the impact of the Competition Act 1998 and the Enterprise Act 2003 and the severity of penalties for proven anti-competitive behavior, any collusion which may exist is likely to be ‘rule based’ and hence very difficult to prove. What is clear is that film exhibition in the UK is highly concentrated and indeed dominated by a few large firms and that these firms exhibit all the characteristic behavior of oligopolists.