A Box Office Disaster

Regulating multiplexes will lead to a lose-lose situation. It will hurt cinema goers, not help them.

The Maharashtra government recently announced that moviegoers will be allowed to take personal food inside multiplexes from 01 August. The announcement followed a public interest litigation (PIL) filed with the Bombay High Court, opposing not only the ban on carrying personal food but also the exorbitant price of food and beverages inside a multiplex.

When Justice Kemkar and MS Karnik of the Bombay High Court heard the petition a few weeks ago, Justice Kemkar said: “The price of food and water bottles sold inside movie theatres are, indeed, exorbitant. We have ourselves experienced it. You (multiplexes) should sell it at the regular price.”

A court order may not be required. The government might intervene before that to set up price caps for the food and beverages sold inside multiplexes. This will be counterproductive, and hurt cinema goers, for two reasons.

One, the government’s policy of price caps is a negative-sum game. It is that lose-lose situation where both multiplexes and cinema goers will be affected.

An unintended but significant consequence of the move will be that the burden of falling revenue will be shifted to all consumers, irrespective of their choice of purchasing food and beverages. In a classic example of concentrated benefits and diffused costs, the benefit of regulated prices will be extended to only those who will consume food, while the cost will be diffused among the other moviegoers.

Multiplex owners have pointed out that nearly 25-30% of their revenue is generated by the food and beverage segment. This means that the businesses will try to cover their losses by simply increasing the prices of tickets. One shudders to think of the other ways the multiplex owners might try to recover the revenue loss–perhaps increase the number or length of advertisements?

Two, the state’s striking down of privately-held rules of multiplexes alters the fundamental character of their business models. Multiplexes are club goods. Some other examples of club goods are housing societies, sports turfs, private hospitals, among others.

Club goods are able to deliver high-quality services because of two essential characteristics: They are excludable and non-rivalrous. What this means is that only an individual buying a ticket and adhering to the rules of admission gets to enter or watch the movie. In other words, everyone else is excluded. Now, the ticket-holders don’t have to compete with one another to watch it as one viewer does not reduce the enjoyment for others, and this means it is non-rivalrous.

The rules of admission and prices that multiplex owners choose to offer creates this exclusivity and non-rivalry, which in turn, sustains their business. But when governments intervene, they disrupt the revenue stream and business model. The result would be similar for other industries in the business of providing club goods, such as hotels.

Government intervention is needless, as markets are able to provide alternatives to discerning consumers such as single-screen theatres for those who prefer affordable food and beverages.

Instead of imposing price caps or fixing an MRP over what is served in the multiplex, one must identify the root cause for such high prices. The GST for a movie ticket is 28% and that for food and beverages is 18%. On the contrary, GST levied on food and beverages outside the movie hall is 5%.

It’s dismal to find that it’s the government that is the culprit behind a high overhead on the cost of food and beverages in multiplexes. In a twisted turn of events, the same government becomes a messiah by announcing price caps on goods, which, paradoxically, it itself has taxed discriminately. The irony remains that the government, aided by the vehicle of a PIL, has tactfully managed to become the saviour in both the eyes of the judiciary and the voters.

The larger picture is bleak. State interventions through PILs points out a pattern, fast becoming a trend. Last year, it was a PIL that imposed a price cap on stents. As expected, it stunted the stent market and made it unviable for businesses to continue.

Pharmaceutical company Abbott has withdrawn two stents from the market as it believes that the price cap makes it an unsustainable business. The result? Heart patients have lost out on potential innovations.

It will not be alarmist to say that a similar outcome awaits Indian multiplexes.

What can be done to douse the need for regulations early on–where petitioners make moral advancements, the government wins brownie points, and businesses and moviegoers lose–is plug the knowledge gap in the judiciary.

About the author

Saurabh Modi

Saurabh is trained in economics and is a student of law at Government Law College, Mumbai. He is an admirer of the blues and jazz music forms, shares his birthday with Ella Fitzgerald and can be found glued to his kindle at all times he is trying to avoid human contact.