I love going to the movies. Of course, I am not the only one. But as an economist, I might look at things through slightly different lenses than most people. Take the Pathé Unlimited card that is offered by Pathé, the largest cinema chain in the Netherlands. The card costs € 19 and provides access to as many movies as the owner likes within the time span of a month. Because Pathé sells single movie tickets for about € 10.50, the card sounds like a wonderful deal. But, as an economist, my instinctive response is: is it really?
A cost-benefit analysis might reveal that the card is not such a great deal after all. The benefits might not be as high as they look from the onset. To make the card more attractive than buying loose tickets, you should watch at least two movies a month. In other words, the card is only worth its price if every two week a movie of sufficient quality is released in a Pathé theater. At the risk of starting a philosophical discussion about what ‘quality’ really is, I wonder whether Pathé releases a movie every two weeks that are more tasteful than Bridget Jones’s Baby, Jack Reacher: Never Go Back, and De Club van Sinterklaas & Geblaf op de Pakjesboot.
Then the costs. Even though you do not have to pay for going to the movies once you have a Pathé Unlimited card, you do pay in terms of time. While being in the cinema, you are giving up some alternative use of time: You can also spend that time visiting your mum, visiting Facebook, visiting a dentist, or reading in Robert M. Pirsig’s Zen and the Art of Motorcycle Maintenance about what actually defines ‘quality’. For most people, such ‘opportunity costs’ are non-zero. The only exception is my nephew Paul. At least he thinks he is. When nephew Paul owned a Pathé Unlimited card, he went to over 100 movies in a year, virtually watching all movies that were released.
Now, imagine that your cost-benefit analysis reveals that buying the Pathé Unlimited card is right up your alley. Are your really better off than in a world without it? I am not sure. In fact, I have had personal experience with such a world when I did my undergraduate studies in the 1990s. Well, it is clear that I am getting old, and I am probably glorifying the past, but as far as I remember, single theater tickets were not sold for 10.50 euros back then but for 10.50 guilders (about € 4.75). For sure, I am not so old that inflation can fully explain the price jump. So, what has been going on?
My hunch is that Pathé is using the Pathé Unlimited card as a quite profitable ‘screening’ device to price discriminate between poor and rich people. How would that work? Imagine Pathé has two kinds of potential clients: ‘poor’ people with loads of spare time and low opportunity costs (like most students) and ‘rich’ people with hardly any spare time and high opportunity costs (like me). Suppose the two groups are equally large. Poor people are willing to go to the movies at most four times a month. They are willing to pay € 4.75 per movie. Rich people can arrange one evening off each month and then are willing to pay € 10.50 for a ticket. You can verify that if Pathé only sold single tickets, it would charge a price of € 4.75. Pathé would sell four tickets to each poor person and one to each rich person. Its profits would be € 23.75 (times the number of clients in either group). Offering the Pathé Unlimited card for a price of € 19 and single tickets for € 10.50, Pathé is able to discriminate between poor people who buy the Unlimited card and rich people who buy single tickets. By doing so, Pathé increases its profits to € 29.50.
Consumers are worse off in a world with an Unlimited card than in a world having only single tickets: while poor consumers obtain zero surplus in both worlds, the rich are better of in the latter world. To be completely fair, some people, conveniently ignored in my analysis, might actually be better off. Recall my nephew Paul. Imagine that he is willing to pay € 3 per movie for up to ten movies a month. If the group of people like nephew Paul is small (I sometimes hope it is), Pathé will stick to the above pricing strategies in both worlds. Nephew Paul would not even bother going to the movies in the old world because he is not willing to pay price of € 4.75 per ticket. However, he is quite happy now he can buy the card as he is willing to pay € 30 for it, which is quite a bit more than the price of € 19.
What lessons might you draw from the above? As far as I am concerned, the main lesson is that learning economics helps students to become more skilled decision makers. Or, as economists David Laibson and John List put it in the 2015 issue of the Papers & Proceedings of the American Economic Review: “Economics courses have the tangible benefit of increasing the optimality of the students’ own decisions.” Trained economists will think twice when buying the Pathé Unlimited card and will ask themselves: are my opportunity costs really low enough to justify me watching movies like Bridget Jones’s Baby, Jack Reacher: Never Go Back, and De Club van Sinterklaas & Geblaf op de Pakjesboot? Indeed, a course in economics might be a fruitful investment for nephew Paul. Moreover, businesses like Pathé also benefit from economic insights. For sure, the marketeers at Pathé have understood that the Pathé Unlimited card can serve as a profitable screening device to skim off surplus of both poor and rich people.