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The Supply of Entertainment
The Supply of Entertainment
1
The Basic Business Model
Total Revenue
• The amount a firm receives for the sale of its
output
Total Cost
• The market value of the inputs a firm uses in
production
Profit
• Total revenue minus total cost
2
What determines Total Revenue
Total Revenue = Price x Quantity
• There may be multiple prices due to price
discrimination
- Balcony seats v main floor seats
- Matinee tickets v evening show tickets
The law of demand
Elasticity of demand
3
The Law of Demand
• The inverse relationship between price and
quantity
- Substitution effect
- Income effectPrice Quantity
demanded
$10 50
$9 60
$8 70
$7 80
$6 90
$5 100
$4 110
$3 120
$2 130
$1 140
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
0 10 20 30 40 50 60 70 80 90 100
Ticket Sales
4
Price Elasticity of Demand
Elasticity of demand
• Elastic: %∆Qd > %∆ P
- a price decrease will actually
increase revenue
• $10 x 50 = $500
• $9 x 60 = $540
• Elasticity = %∆Qd / %∆ P = -6.3
- For each 1% decrease in the price
we will sell 6.3% more tickets
Price Quantity
demanded
$10 50
$9 60
$8 70
$7 80
$6 90
$5 100
$4 110
$3 120
$2 130
$1 140
5
Beware: demand is not always elastic
Inelastic: %∆P > %∆ Qd
• a price decrease will actually
decrease revenue
• $5 x 100 = $500
• $4 x 110 = $440
• Elasticity = %∆Qd / %∆ P = -.7
- For each 1% decrease in the price
we will sell 0.7% more tickets
In this case we would do better to
raise the ticket price
• $6 x 90 = $540
Price Quantity
demanded
$10 50
$9 60
$8 70
$7 80
$6 90
$5 100
$4 110
$3 120
$2 130
$1 140
6
Demand tends to be more inelastic
the fewer the number of close substitutes.
the smaller a percentage of my budget it is.
if the good is a necessity.
the more broadly defined the market.
• food v hotdogs
• entertainment v Broadway
the less time I have to adjust to a price
change.
7
Hamilton: elastic or inelastic?
Shows sold out at $179 -$849
Are there close substitutes?
Is the price a large percentage of my budget?
Is it a necessity or a luxury?
What, exactly, is Hamilton?
• Entertainment?
• Broadway theatre?
• The greatest musical ever?
• A once in a lifetime event?
How long will it play?
8
Why are there rush tickets?
Price discrimination
• Perishable goods
- Decay
- Cannot inventory
• Market control
• Identify customer willingness to pay
• Control resale
The Hamilton Lottery
Scalping
9
What determines Cost of Production
Total Cost = Average Cost x Quantity
Cost of production depends on quantity and
quality of
• Labor
• Capital
• Natural resources
Two types of costs
• Fixed
• Variable
Total cost = TFC+ (AVC x Quantity)
10
The Law of Supply
Price
Quantity
Supply
D1
D2
11
The Law of Supply
Price
Quantity
Supply
D
$200
2000
$300
12
Scalping and the Hamilton Lottery
Price
Quantity
Supply
D
$200
2000
$300potential
scalping
profits
$10 The Hamilton lottery
13
Profit viewed another way
Marginal Revenue is the additional revenue from
producing an additional unit
• E.g. the revenue from selling one more ticket
Marginal Cost is the additional cost of producing
an additional unit
• MC increases as output increases
• Remember the upward sloping supply curve
14
Profit maximization
MC
MR
Should I extend the run of my show one more week?
Quantity of shows (weeks of production)
Tic
ket price
15
But what is The Product?
Performance goods are “excess capacity” goods
What does the movie industry produce?
Is the print of the movie the product?
• What happens to output if I add one more star
to the cast?
Or is each ticket sold the product?
• If I add one more star to the cast, how many
more tickets can I expect to sell?
16
Industry structure
Competitive Monopolistic
competition
Oligopoly Monopoly
Buyers and
sellers
Gobs Gobs Few One seller
Relationship
of goods
Homogenous Weak
substitutes
Homogenous
or
heterogeneous
Unique
Ease of
entry
Easy Easy Difficult or
impossible
Impossible
Price setting
power
None Some Strategic
behavior
Complete
examples entertainment Fine arts:
opera
symphony
theater
Movie studios NFL
17
Industry structure
Competitive Monopolistic
competition
Oligopoly Monopoly
Buyers and
sellers
Gobs Gobs Few One seller
Relationship
of goods
Homogenous Weak
substitutes
Homogenous
or
heterogeneous
Unique
Ease of
entry
Easy Easy Difficult or
impossible
Impossible
Price setting
power
None Some Strategic
behavior
Complete
examples entertainment Fine arts:
opera
symphony
theater
Movie studios NFL
Compete for same grants, donations, customer
dollars, but their products are imperfect substitutes
18
Structure of the entertainment industry
opera
symphony
theater
movies
football
art
museum Professional
jello
wrestling
basketball
television
© 2007 Thomson South-Western
Phantom of
the Opera
Star Wars: The
Force Awakens
Global box office $2 billion $2 billion
Average production
and premarketing
costs
$9 million $245 million
Length of run 28 years 24 weeks
Characteristics of major hit musical
vs major hit movie
© 2007 Thomson South-Western
All Time Domestic Box Office Gross (through January 27, 2019)
Broadway Domestic Gross Shows Years
Lion King $1.6 billion 8832 1997
Wicked $1.3 billion 6367 2003
Phantom of the Opera $1.2 billion 12,903 1988
Chicago (revival) $641.6 million 9227 1996
Mamma Mia $624.4 million 5758 2001-15
Hollywood Domestic Gross Weeks in
theaters
Year
Star Wars: The Force Awakens $936,662,225 24 2015
Avatar $760,507,625 34 2009
Black Panther $700,059,566 25 2018
Avengers: Infinity War $678,815,482 20 2018
Titanic (plus 3D re-release) $658,672,302 50 1997
© 2007 Thomson South-Western
Broadway vs Hollywood Box OfficeWeek ending January 27 (Broadway) January 31 (Hollywood), 2019
Broadway Weekly gross Avg ticket Top ticket % seats sold
Hamilton $3,147,991 $293 $849 102%
Harry Potter $1,957,299 $151 $297 100%
The Lion King $1,850,189 $138 $225 98.7%
Wicked $1,523,751 $107 $240 98.8%
Hollywood Weekly gross Screens Weeks
Glass $24,578,965 3844 2
The Upside $15,835,282 3377 3
Aquaman $9,538,166 3134 6
The Kid Who Would Be King $8,793,676 3521 1
14 movies had a box office gross in excess of Hamilton in this week
© 2007 Thomson South-Western
Fundamental Economic Problem of
Live Entertainment
• Difficult to increase productivity
• Technology hasn’t been able to make
workers more productive in this industry
like it has in most others
– It takes the same amount of time and labor
to perform Beethoven’s 9th
symphony today as it did in 1824
– Of course this varies across entertainment
venues. How has technology affected the
movie industry?
Hey, I
heard
that
