QuadPlex Cinema is the only movie theater in Idaho Falls. The nearest rival movie theater, the Cedar Bluff Twin, is 35 miles away in Pocatello. Thus QuadPlex Cinema possesses a degree of market power. Despite having market power, QuadPlex Cinema is currently suffering losses. In a conversation with the owners of QuadPlex, the manager of the movie theater made the following suggestions: “Since QuadPlex is a local monopoly, we should just increase ticket prices until we make enough profit.”
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The manager's suggestion to increase ticket prices because QuadPlex Cinema is a local monopoly may not necessarily be the best solution to the theater's losses. While it's true that having market power allows QuadPlex Cinema to influence prices to some extent, there are other factors to consider.
To determine whether increasing ticket prices is a viable approach, the manager should analyze the demand elasticity for movie tickets. Elasticity measures how responsive the quantity demanded is to changes in price. If demand for movie tickets at QuadPlex Cinema is relatively elastic, meaning that a small increase in price leads to a proportionally larger decrease in demand, then raising ticket prices may not result in significant profit gains.
To assess demand elasticity, the manager could conduct a market research study. This could involve surveying customers or analyzing historical data on ticket sales and prices. By understanding the price sensitivity of customers, the manager can make an informed decision on whether increasing ticket prices would have a positive impact on profit.
Additionally, the manager should also consider other factors that may be contributing to the theater's losses. For example, lower attendance could be due to a lack of diverse movie options, poor customer experiences, or increased competition from other forms of entertainment. Addressing these issues might be more effective in increasing revenue than solely relying on raising prices.
In summary, while having market power as a local monopoly does provide some flexibility in setting prices, it is important for the manager of QuadPlex Cinema to consider demand elasticity and other factors that may be influencing the theater's losses before deciding to increase ticket prices. Conducting market research and addressing potential underlying issues can help create a more comprehensive strategy for profitability.