Why Destructive Value Capture?

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Economics
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Previously: Front Row Center

I got a lot of push-back from suggesting that there was a way for theaters to improve their customer experience and value proposition at low cost (get rid of the seats that are so close to the screen they cause neck strain), and that theaters should do that.

The push-back didn’t argue that the method wouldn’t improve the customer experience at low cost. There were a few who suggested an alternate high-cost solution that improves the experience more (use high-quality and assigned seating at a substantially higher price point), and which some places have implemented. No one argued that, where the higher-cost solution didn’t make sense. my incremental suggestion wouldn’t improve the customer experience versus status quo, at relatively low cost.

They also didn’t raise the reasonable argument that getting people to do things at all, especially slightly non-standard things that might look bad on superficial metrics during the pitch meeting, is hard. People don’t think about things, they don’t do things, they don’t optimize, and so on. One could reasonably argue this isn’t worth the effort.

Instead, everyone argued that, unless they were forced to do so, theaters shouldn’t implement the suggestion. Because it would cost them money – they couldn’t sell those few terrible seats, and forcing people to come early increases ad and concession revenue.

That’s interesting. And weird.

The proposition creates value. One comment from Quixote estimates $1.67 in customer time-value is saved in exchange for the loss of $0.10 in ad revenue.

The proposition improves the customer experience. It generates movie-going habits, loyalty and goodwill.

Not implementing the proposition is a destructive value capture. In order to get a little revenue, an order of magnitude more value is destroyed.

Destructive value capture is normal. In order to capture value, some value is typically destroyed. But when you’re destroying most of the value you withdraw from the system, you should be suspicious mistakes are being made. At a minimum, it’s worth asking on a deeper level why this is happening. What could justify it? What failure mode are we in? How does it come to be, why does it persist, is there a way we can solve it or minimize it? We shouldn’t shrug and mutter something about capitalism. We should treat this as a major failure, and brainstorm potential barriers even if they don’t apply in this case.

Can’t Raise the Price

If you’re charging $15 to see a movie, then destroying $1.50 in value to generate $0.15 in additional income, why aren’t you just not doing that, and instead charging $15.25 to see the movie?

What might stop this from being a good solution?

What if movie was free? Moving from free to not free is a huge change, even if the additional cost is small. This could drive people away and be hugely value destructive.

What if this introduced an additional collection point? You’d need to ask someone for money an additional time to make up the additional cost, and that could be value destructive.

What if this disrupted a standardized price or crosses a key threshold? Suppose everyone knows that movies cost $15, and there would be a strong reaction against a price of $15.05, because it’s different, or because it makes it hard to give exact change.

What if the market encouraged sorting purely by price? Imagine a world like with plane tickets, where you go to Kayak or Orbitz or what not, and there is strong default pressure to buy the cheapest tickets without noticing extra charges.

What if regulation prevented higher prices? That which is forbidden is not allowed. Price controls often cause perverse reactions.

Those would be good reasons. All clearly do not apply. Movies aren’t free (or if you have MoviePass, they would stay free). Movies have a collection point. Movies don’t have a standardized prices or a strong price-sorting search mechanism, and prices are rarely at a key threshold.

Other reasons might apply somewhat, but still seem weak.

What if this would be a price increase and that would be bad? Thus, the bad event of ‘prices went up’ could matter even if the new price isn’t much different from the old price, so you can’t do that often. A tiny increase might be impractical.

That’s fair. But the increase could be put into a later, larger increase, or if that’s too big a burden, one could wait on implementation until the next price increase.

What if higher prices decrease customer experience, so they’re more expensive than they look? 

I grant this is likely true for some, but the effect size should be small.

What if this is a pure bad when demand is low, such as at a matinee, and complexity cost prevents price discrimination? 

Again, this seems true but effect size is small. Some places price discriminate by time but the complexity cost stops the majority. So even though removing the seats costs nothing when demand is low, raising the price at those times is net bad.

Would a price increase send the wrong message? Would people then worry about the health of your company, or your industry? Would it thus push down stock prices or reduce your ability to raise money?

It might, indeed. It also might do the opposite. I don’t think this is what’s going on here.

All of that is seeking solutions to the easy out: raising prices. Or, if prices are already higher than they should be, lower them to where they should otherwise be, then raising them back.

Let’s take away that easy out, and say one of the good reasons applied. You can’t raise the price and demand exceeds supply.

This is pretty terrible even if you don’t then do value capture. Destructive value allocation is bad enough, via making people wait on lines or make commitments or virtue signal or what have you – anything where the auction involves incinerating rather than redistributing the bids, often all-pay auctions at that. One can think of this as balancing supply and demand by making quality of the supply sufficiently worse. 

Thus we have two mostly distinct problems. We need to pay for the creation and maintenance of nice things without destroying what makes them nice. And we need to do efficient allocation of those nice things, that balances supply and demand and gets the product to the right people.

Letting the price float is the best way to do both, but what happens when you can’t do it? Are we now stuck with terrible seating and massive deadweight loss? What about other situations where the price is stuck? A life lived under advertising’s increasingly long and intrusive shadow? Or worse, the evil bastard children of microtransactions and free to play games?

We seem to be headed that way. I think there are promising answers, which I hope to explore further. That starts with defaulting to price adjustment, and finding creative ways to do price adjustment, and viewing destruction of value as a failure rather than normality or ‘the way of business.’

 

 

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13 comments, sorted by Highlighting new comments since Today at 4:42 PM
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Generally, people have a heuristic of "if this is straightforwardly and immediately harmful, I'm going to be very skeptical about claims that contradict that. And this is not just because they're stubbornly being irrational--it's because it's a lot easier to make a mistake or be convinced by sophistry when looking at long indirect chains of causation than direct ones.

The straightforward and immediate effect of not trying to sell a seat is that you lose money because you forego the possible income from selling that seat. It is possible that ripping out those seats has secondary effects that cumulatively result in you making more money anyway. But actually doing that calculation is hard (and your original post did not do the calculation--it speculated instead), and you are limited in how well you can assess the correctness of such a calculation. It ends up becoming a form of epistemic learned helplessness where the correct thing to do is to massively discount arguments for doing things that straightforwardly harm you.

What if this is a pure bad when demand is low, such as at a matinee, and complexity cost prevents price discrimination? 

What about when demand is high temporarily, such as opening night for a movie? It seems like those are important not just for the immediate effects (more tickets sold that day) but also the second-order effects (marginal customers who care most about seeing particular movies on opening night, and then sometimes go to movies, which by habit will be more likely to be at the last theater they saw a movie at, and thus are more likely to be captured by a theater with more maximum seating).

Instead, everyone argued that, unless they were forced to do so, theaters shouldn’t implement the suggestion

People said different things I suppose, but I did want to note that this wasn't precisely what I was saying. But FWIW, "IF theaters are profit-maximizing, THEN it's not obvious that implementing the suggestion will help them with their goals" was the thing I was pointing at, which I think is subtly but importantly different.

I think you're correct to note that many of the responses to the original thread (including mine) were uncompelling. I also think you're absolutely right that merchants (and customers) should continue to examine the transactions they're participating in, and to look for ways to reduce both monetary and non-monetary costs which don't benefit the participants.

I hadn't examined my reaction, before responding with some canned obejctions. My real objection (I think; I'm flawed and can't always understand my own motivations. I can definitely say that this kind of argument really bugs me) is to the oversimplification of the model and attempt to other-optimize a game in which you have no skin.

On one part of the essay, you're so correct that you're late to the game: there are LOTS of reserved-seat theaters, which often cost more, and they are EXCELLENT choices for those who value their time and guaranteed good seat more than the money.

I pretty much only go to non-reserved theaters for late-in-the-run and unpopular showings, where I expect the theater to be at least half-empty, so I can show up roughly on time and still get decent seats. And I recognize that I'm atypical on many dimensions, and don't begrudge those who prefer to wait in line to get possibly-bad seats so they can see things earlier in the run without the planning and commitment of buying tickets weeks earlier.

On another topic (complaining that the theaters even HAVE bad seats), you're simply wrong. Someone is willing to pay for those seats, sometimes. They don't cost the theater ANYTHING to keep, and they don't force anyone to sit there, so it's a pure positive value when someone chooses to use that option. Even if very few people actually use those seats, there's some menu-option value in making people feel better about the seats they DO use, because they can more easily compare to the ones they don't. That's _really_ hard to measure, but leaving it out of your model is a mistake.

On a different level (complaining about someone else's business model), I find it painful to see someone with no skin in the game telling a someone that they're stupidly failing to optimize the world, when any unproven change carries a risk of even more destruction (in terms of having to close the business entirely). Perceived risk of change is something that we just can't wave away. Posts that attempt to analyze a "failing" in an institution which don't sympathize with the fears and risks of committed participants (who live and die by it, like owners and managers) and only focus on the convenience of casual participants (moviegoers), even if casuals outnumber committeds by a lot, are usually missing some very key points.

Note: I _ALSO_ think that for a whole lot of people, it's incorrect to assume statistical altruistic motivation. Many theater owners _are_ jerks who are willing to burn the world to make an extra buck. Many moviegoers will take advantage of any loophole to pay less to get good seats at a heavily-contended showing. Figuring out mechanisms to optimize welfare within these motivational constraints requires more complicated models.

They don’t cost the theater ANYTHING to keep

This may be approximately true, but I don't think it's obvious and uncomplicated.

According to the googling I did on the last post, the price to the theatre of showing a film goes up with the number of seats. It's banded, so unless they're near the bottom of a band, removing those seats will have no marginal effect on that. And we'd expect them to cluster near the tops of bands.

But I can imagine other things it might have an effect on: ad revenue, trailer prices (I think they have to pay to show them, but I'm not sure), insurance prices, weird corporate manoeuvring (if we increase our seat count by 5%, we'll be able to negotiate a better deal).

Can you charge different prices to people based on their income. Theatres can make a lot more money by charging more to rich people and less to poor people. Suppose the movie has the same 0.5 hour of value to 3 movie goers. One movie goer makes $10/hr and will not pay more than $5 to see the movie. One movie goer makes $50/hr and will not pay more than $25 to see the movie. One movie goer makes $200/hr and will not pay more than $100 to see the movie.

Question: if the movie theatre is not allowed to change it's price for the movie then what is the most profitable price for the movie theatre to set for the movie tickets.

Multiple choice Answer:

1) ticket price says "$5" for the movie ticket. the movie theatre sells 3 tickets and gets $15 revenue.

2) ticket price says "$25" for the movie ticket. the movie theatre sells only 2 tickets and gets $50 revenue.

3) ticket price says "$100" for the movie ticket. the movie theater sells only 1 ticket and gets $100 revenue.

4) ticket price says "0.5 hours" for the movie ticket. The Dollar price is calculated based on the $/hr rate of each individual ticket buyer. One ticket sells for $5, one ticket sells for $25, and one ticket sells for $100. the movie theatre gets $130. :-) everyone sees the movie, no destructive value capture. economic inequality is reduced, and the theatre makes the most money.

Time, unlike money, is not fungible. The value of $0.5 hours of my time is close to 0 for some activities and in some of my mental states, and $thousands for other situations. And the value to me does not often match the value to others (leading to sometimes selling time, and sometimes buying time). More directly, why on earth would any moviegoer give an honest value for their time, when they can pay less money by claiming less?

Also, I suspect there are enough substitutes available that the price elasticity is much higher than your example. You won't sell 2/3 as many at 5x and 1/3 as many at 20x, you'll sell 0 for much more than 1.5x, and you'll be supply-constrained at 0.5x.

Could it just be that everyone with enough skill in decision theory and psychology to recognize this failure has realized that there are more important problems to work on? I have a flexible neck and thought they were the best seats, so your assumptions of the dynamics may be flawed.

Could it be that the average customer hasn't thought it through enough to realize they are incinerating $1.67 of time-value, and would thus prefer to pay $15 plus *mumble* time as opposed to $15.25 plus zero time?