Sunday, February 26, 2006


We went to see 'Munich' last night - Steven Spielberg's movie about an Israeli vengeance squad tasked with assassinating those claimed to be behind the murder of 11 Israeli athletes at the Munich Olympics in 1972. The Wikipedia article on the massacre suggests that the movie is not a documentary. A very fine film which we did not forget the moment we walked out of the door.

From matters of blood, honour, homeland, life and death to economics. The cinema tickets cost £6.50 each. We were given vouchers worth £1.50 each to see our next film, so that our next tickets would cost only £5.00 each. Why did the cinema do that?

A first thought might be that by lowering the price, the cinema was stimulating demand, and that this would somehow increase its returns. However, why issue a voucher? Why not just decrease the price to £5 per ticket for everyone. No, only people who had already bought a ticket were eligible for the reduced price.

This is an example of 'diminishing marginal utility'. By buying tickets for Munich at £6.50, we had already established that this was a fair market price for the film we most wanted to see. Had there been another film we valued more highly than Munich, then we would have seen that one.

Given that the portfolio of films changes fairly slowly, the cinema was bidding for our custom for our next-preferred film. As we certainly valued that lower than Munich, the cinema therefore gave us a lower price (£5.00). (Note that the marginal cost to the cinema is effectively zero, so they always make money).

Always nice to see effective price discrimination in action.