This blog post examines the decline in Korean movie theater audiences from the perspectives of price increases and price elasticity of demand, analyzing both consumer and corporate choices.
The Financial Freedom to Skip the Theater
Every year from late July to early August, several large-scale, so-called tentpole Korean films are released. The theater industry, which suffered greatly from COVID-19, began showing these films again starting in 2022. While some films received poor reviews or sparked controversy, even those that were relatively well-received often failed to draw large audiences.
Recalling past summers when at least one film surpassed 10 million viewers and multiple films exceeded 5 million, the current film industry indeed leaves much to be desired in terms of audience mobilization. While various analyses have been proposed for this situation, the most crucial points are ‘price’ and ‘elasticity’. Three clear facts are evident in the current film market: ticket prices have risen, audience numbers have fallen, and consequently, theater revenues have also decreased.
Compared to 2019, before the COVID-19 pandemic, ticket prices in 2022 have risen by approximately 40 percent. During the period from July 20 to August 24, the number of moviegoers decreased by 32 percent, and revenue for the same period fell by 17 percent. Prices have remained elevated since then, and audience recovery has been limited.
When the price of an item rises, consumers generally reduce their demand. From the perspective of a business, or the supplier, revenue is determined by the product of price and sales volume. So, what happens to revenue when prices rise? The answer is not simple; in a word, it is ‘unknown’. From a company’s perspective, if sales volume remains the same, revenue would increase. However, if the price hike causes sales volume to decrease, there is also the possibility that revenue could actually fall.
What is elasticity?
The key point is ‘how much people reduce their demand when prices rise’. In economics, this is called ‘elasticity’, or more precisely, ‘price elasticity of demand’. This difference in elasticity determines whether a company’s revenue increases or decreases after a price change. If something is elastic, when the price rises, the revenue per individual item increases, but overall revenue decreases because the sales volume drops significantly. Conversely, if something is inelastic, even if the price rises, the drop in sales volume is not large, so the company’s overall revenue may actually increase. This is because the revenue increase from the price rise is greater than the decrease in sales volume.
Let’s examine this with simple numbers. If a movie ticket costs 10,000 won and daily attendance is 180,000 people, the theater’s daily revenue is 1.8 billion won. If the ticket price is raised to 12,000 won but daily attendance remains the same at 180,000 people, the theater’s revenue increases to 2.16 billion won.
However, it’s natural to expect that ticket prices rising will cause audience numbers to decrease. If demand is highly price-elastic, the audience could drop below 150,000. For example, if the audience falls to 130,000, revenue would be 1.56 billion won, actually decreasing compared to before the price hike. Conversely, if elasticity is low, the audience might decrease but not fall below 150,000. For instance, assuming attendance drops to 160,000, while this represents a decrease of 20,000 compared to 180,000, revenue would reach 1.92 billion won, exceeding the pre-increase level.
An important implication to consider here is that companies cannot arbitrarily raise prices. For example, suppose one company monopolizes all water. Since water is essential for survival, this company could set the price quite high. Economically, such goods are described as having ‘low elasticity’.
However, for goods or services with high elasticity, a price increase can lead to a significant drop in demand, making a decline in sales highly likely. Therefore, while a company might consider raising prices to compensate for sales losses caused by external factors like COVID-19, it must bear in mind that if the elasticity of that particular good or service is high, it could face the double whammy of even greater sales declines.
The Consumer’s Perspective and the Company’s Perspective
The overall principle of how prices are determined is slightly more complex than what has been explained so far. A company’s cost structure must also be considered, and market characteristics significantly influence price determination. In monopolistic markets, companies occupy a relatively advantageous position. Consequently, companies engaging in price-fixing collusion are considered unfair and subject to penalties. The film industry also features a conglomerate-dominated oligopoly structure, which favors companies. However, even in this case, excessive price hikes can ultimately harm the companies themselves.
From the consumer’s perspective, corporate price increases can be unpleasant and frustrating. Yet, a price hike itself is not necessarily inherently unfair or illegal. In fact, the company raising prices might still incur losses. Consumers can pressure companies through protests or boycotts, but the most fundamental and powerful choice is simply ‘not buying if it’s too expensive’.
So what is the company’s position? Companies strive to maximize profits within the bounds of the law. It is true that raising prices is relatively easier when there are fewer competitors. However, excessively raising prices also increases the risk of losing customers and declining sales. Therefore, companies must consider demand elasticity—that is, consumer loyalty. Furthermore, one approach is to distinguish between the majority of consumers with low interest (highly elastic consumers) and the minority with high interest (lowly elastic consumers) to formulate pricing strategies. Since elasticity varies by product and consumer preferences differ, companies need to employ more detailed and sophisticated pricing strategies.
For instance, in the male idol industry, the purchasing power of a small group of highly loyal fans significantly influences overall sales compared to other genres. Similarly, in mobile games, overall revenue is often sustained by a small number of highly loyal users making substantial cash payments. Conversely, for some films like “Decision to Leave,” while passionate audiences may watch multiple times, it is relatively difficult for a small fan base to decisively determine overall sales compared to other industries.
Can Korea’s film market recover?
Let’s turn our attention back to the film market. Multiple complex factors likely contributed to the decline in movie attendance. Each year sees a diverse range of films released, including both high-quality works and those that fall short. Therefore, the quality of films themselves could certainly be a reason audiences are avoiding theaters. Additionally, COVID-19 made it difficult for audiences to watch movies in theaters for a certain period, and during this time, the very environment for film consumption changed significantly. Aggressive marketing by OTT platforms like Netflix and TVING continued, and the number of YouTube users also increased substantially. Statistically isolating these various environmental factors to accurately estimate the impact of price increases alone is quite difficult in reality.
Nevertheless, the higher ticket prices certainly have the potential to make people who don’t frequently watch movies hesitate to go. While regular moviegoers can likely absorb the increased prices to some extent, those who only see movies three or four times a year might reduce their viewing frequency, avoid opening weekends, or wait to see reviews before deciding whether to watch. The film industry has now reached a point where, alongside cost-cutting efforts, it must undertake a more dispassionate and systematic analysis of its overall pricing strategy.
