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, PuadPlex Cinema is currently suffereing losses. In a conversation with the owners, 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." Comment on this strategy. How might the market power of QuadPlex Cinema be measured? Also, recommend, the options that QuadPlex consider in the long run. Fully explain your answer in terms of market power.
Your subject is probably marketing.
Increasing ticket prices may seem like a logical strategy for QuadPlex Cinema to make more profit, given its market power as the only movie theater in Idaho Falls. However, it is important to consider the concept of price elasticity of demand. This measures how sensitive consumers are to changes in prices, and it plays a crucial role in determining the success of such a strategy.
If QuadPlex decides to increase ticket prices significantly, it may experience a decrease in the number of tickets sold. This is because higher prices can deter consumers from purchasing tickets, especially if they can find alternative entertainment options or are unable to afford the increased prices. The loss of customers due to higher prices may offset the potential increase in revenue per ticket sold, thus leading to overall losses for QuadPlex Cinema.
To measure the market power of QuadPlex Cinema, economists often use a metric called the Herfindahl-Hirschman Index (HHI). This index quantifies the market concentration by summing the squares of the market shares of all firms in the industry. A higher HHI suggests a higher degree of market power for a particular firm or group of firms. In this case, since QuadPlex Cinema is the only movie theater in Idaho Falls, it would have a high market share and therefore a high HHI, indicating significant market power.
Considering the long run, QuadPlex Cinema has several options to improve its profitability and sustainability. One option is to focus on enhancing the overall movie-going experience by investing in comfortable seating, improved sound systems, or advanced technologies like IMAX or 3D. By offering a differentiated and superior experience, QuadPlex may be able to attract more customers even if ticket prices are relatively higher.
Another option is to diversify its revenue streams by adding complementary services such as a café or a gaming area. QuadPlex Cinema could also explore partnerships with local restaurants or offer special deals to provide a more comprehensive entertainment package.
Furthermore, QuadPlex Cinema could invest in marketing and promotion strategies to increase awareness and attract moviegoers from neighboring areas. By actively promoting their unique offerings and events, QuadPlex can expand its customer base and potentially reduce the impact of being the sole movie theater in the area.
In summary, while increasing ticket prices might seem like an easy solution for QuadPlex Cinema to increase profits, the strategy should be approached with caution considering the price elasticity of demand. Other options, such as enhancing the movie-going experience, diversifying revenue streams, and investing in marketing, can be more effective in the long run to address the challenges faced by QuadPlex Cinema and leverage its market power in Idaho Falls.