Wednesday, January 13, 2010

Why watch previews at the movies?

Jeff Ely at Cheap Talk had an interesting discussion of this question today.
[...] Each of us decides at home how early to arrive trading off the cost of our time versus the probability of getting stuck in the front row. The “winner” of the auction is the person who arrives earliest, the prize is the best seat in the theater, and your bid is how early to arrive. It is “all pay” because even the loser pays his bid (if you come early but not early enough you get a bad seat and waste your time.)

In an all pay auction bidders have to randomize their bids. Because if you knew how everyone else was bidding you would arrive just before them and win. But then they would want to come earlier too, etc. The randomizations are calibrated so that you cannot know for sure when to arrive if you want to get a good seat and the tradeoffs between coming earlier and later are exactly balanced.

As a result most people arrive early, sit and wait. Now the previews come in. Since we are all going to be there anyway, the theater might as well show us previews. Indeed, even people like me would rather watch previews than sit in an empty theater, so the theater is doing us a favor.

And this even explains why theater tickets are always general admission. Let’s compare the alternative. The theater knows we are “buying” our seats with our time. The theater could try to monetize that by charging higher prices for better seats. But it’s a basic principle of advertising that the amount we are willing to pay to avoid being advertised at is smaller than the amount advertisers are willing to pay to advertise to us. (That is why pay TV is practically non-existent.) So there is less money to be made selling us preferred seats than having us pay with our time and eyeballs.
To me, it's interesting that the movie theater is taking advantage of an inopportune situation. If the theater chose to not show pre-movie advertising, there will always be a moment where there's a theater full of people who are staring at a blank screen. It would be crazy to not advertise to a willing audience. Moreover, in the absence of advertising, it's unavoidable to have people sitting there with nothing to do. It reminds me of the line at the grocery store: an unavoidable advertising opportunity.

From this perspective, some advertising seems desirable for everyone involved. For most people, advertising is a complementary good to watching the movie. Even for those people who consider advertising a bad thing, it is probably a necessary evil to fill the awkward silence before the movie showing. Indeed, to borrow Jeff Ely's line, the theater is doing us a favor, but then they continue to do us this favor, and show another 20 minutes of previews.

In a world where everyone thinks that the pre-movie advertising is a nuisance, why show any advertising after the lights dim? In 1993, Gary Becker and Kevin Murphy wrote a paper that answers this question. From their analysis, it turns out that advertising can be a good or a bad from the perspective of the consumer, but it can work in either case. Take two examples of advertising that works:

1. Beer advertisements on television usually work by giving us a good laugh that causes us to remember the product the next time we show up at the store. In fact, one of the reasons that people watch the Super Bowl is to see the new advertisements. This is an example of advertising as a good. To most people, it isn't surprising that this works.

2. The beggar on the street with the cardboard sign makes you feel terrible (it enters negatively into your utility function to walk past him), so you put money in his box. People will cross the street (or change their walking route) to avoid beggars. They'll rarely cross the street to happen across the beggar to give him money. This is an example of advertising that is a bad, but works nonetheless.

So, let's return to the question of why the movie theater annoys us by showing 20 minutes of previews. I'm inclined to think that the advertising works, but I am not sure how much the advertiser benefits from showing the ads. That's a difficult question to sort out. I wouldn't be surprised if the people who pay for the ads pay much more to air the ads than they are worth.

As to the question of why people show up for the ads: Maybe people don't want the worst seat (as Ely suggests), but it is also likely that people don't want to show up to a dark movie theater. And, we can't rule out the possibility that people just like seeing those silly previews.

7 comments:

  1. I think you hit the nail on the head with the first point--advertising in the case of movies is a good, at least for a subsection of the population.

    However, I don't think we even need that strong an assumption. We just need to imagine heterogeneity in elasticity for movies being conjoint with value of time among movie consumers

    Let's imagine pricing seats is infeasible. Then previews may be a movie theater's way of price discriminating.

    If people with high value of time are relatively inelastic demanders of movies, while people with low value of time are relatively elastic demanders, then giving the "good" seats to those who are the more elastic demanders might seem to make sense.

    I haven't thought through the potential holes in this theory (e.g. if time-sensitive price might be a more efficient mechanism, etc.), but it keeps previews as a bad and speaks to two things we can measure--price elasticity and value of time.

    Interested in your thoughts.

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  2. That's an interesting set of ideas, but I think you need another link in the chain to get that story to work.

    A movie theater manager would really like to charge different prices to different people. And, we'd be tempted to say that an effective way to price discriminate is to show advertisements that elastic demanders with low time cost will tolerate (it costs them less), but inelastic demanders with high time cost will avoid.

    But, how does charging people in time exposure to advertising benefit the movie theater? Moreover, inelastic demanders with high time cost don't end up paying the theater more money (as is the case with a standard price discrimination story)

    To prop this story back up, I think there's an implicit assumption that the advertising works, AND that it works to further the objectives of that particular movie theater or movie theater chain (perhaps, the low time cost folks will go buy some popcorn after seeing the ad, and will come back next week to see the movie that previewed first, etc.).

    Even so, if the advertising brings people back to the movies, but possibly to a different movie theater, the effect of charging people in advertising is muted.

    Notice that this story is quite different from the standard price discrimination story. There: the firm price discriminates to charge a higher markup on inelastic demanders. Here: the firm "price discriminates" to expose a particular segment of the audience (elastic demanders) to more advertising.

    In short, if the elastic-demand-low-time-costs people in your version of the facts are suckers for advertising, this story could work as an avenue toward greater profits.

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  3. I would suggest there is volumes of marketing research on this topic. I may even go looking for it later. I doubt the decision as to if, what and how profitable ads are to show before movies is taken lightly.

    Fletch

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  4. I also doubt that it is taken lightly, but most companies are unwilling to randomize the amount of advertising they use. Without randomization, it's nearly impossible to sort out correlation versus causation.

    The result is that much of the practice of advertising mistakes correlation for causation. The fact is that it's really difficult to know the extent to which advertising works. I know some prominent economists who don't believe that advertising really has an effect (at least, they don't believe anyone has shown compelling evidence).

    As far as economic research, sometimes "as if" randomization is possible. There's an interesting paper by Joel Waldfogel on the effect of advertising in the wake of the 41 Liquormart decision (which allowed for advertising where it was previously prohibited in Rhode Island).

    If I recall correctly, there was also an interesting advertising experiment with Yoplait 150 in a couple of Midwest markets. In that study, the authors found that advertising could get new consumers to try something, but once someone has a taste (or not) for a product, advertising is not effective.

    This is all to say that there are many dimensions to the advertising decision, and these dimensions are not easy to sort out with respect to correlation and causation.

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  5. Tony

    I was thinking there is probably a lot of scholarly research by Marketing departments at top universities. Looking there may help keep us from trying to reinvent the wheel on a lot of this research. I haven 't looked there yet, but I've been thinking marketing professor's interests are very close to or the same as micro economists. I'm sure they know the math too. Maybe a bad assumption on my part.

    Fletch

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  6. I think there probably is a lot of scholarly research in marketing departments. Plenty of it is good, too. It's definitely worthwhile to look there.

    Part of my sentiment is coming from one of my IO field courses: one of our topics was advertising. We reviewed the literature, and there seems to be quite a bit of room for improvement (especially on the correlation-causation frontier). That's more a function of what data are available than anything else.

    The rest of my sentiment is coming from the disconnect between the actual practice and current scholarly research. Two points here: (1) Even if they fully understood the distinction, I'm not optimistic that marketing firms have an incentive to distinguish correlation and causation for their clients; (2) I don't think that most companies have the discipline to structure their data in a way that would let them infer causation (i.e., randomize their advertising, and see what happens).

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