The economics of entertainment books
Posted April 9, 2008on:
In Australasia we have this thing called an entertainment book (the Wellington example is here). The book costs $55 dollars and you get also sorts of deals on restaurants, hotels, and other entertainment options in the local area.
Even when I was a student this book paid for itself by making my Burger King cheaper and saving me money when I took my girlfriend out for a date. As a result, I am confident that there are a large number of consumers who will be happy to use this sort of book and I will abstract from the (interesting) issue of consumer demand.
In fact, if you are interested in a Wellington entertainment book, contact me at firstname.lastname@example.org – my hockey club is selling them in order to raise funds 😉
Instead I am going to look at some of the reasons why the firms in the book are willing to be in the book.
Now the reasons I can list off the top of my head are:
- Price discrimination,
- A prisoners dilemma.
The first one is incredibly obvious, by putting the name of your firm in the book people realise it exists. As this reduces the search cost of finding you compared to firms not in the book this is good for the firm. Furthermore, your advert in the book may in itself increase demand. Add to this the fact that restaurants are often “experience goods” and this argument for going into the book makes sense.
The second type of argument for it is “price discrimination”. Assume that the restaurant/movie theater has repeat clients who are willing to pay a high price to consume this good. However, the price that maximises profit amongst this type of client is too high for any of the other types of agents who would be willing to buy the good at a lower price – a price that the restaurant is willing to sell at (think monopolistic competition). In this case, the firm may be able to increase profit by allowing a one-off discount, whereby a large swath of additional customers appear to have one meal a year (assumes that demand from this section of the market is relatively elastic and also that these clients have sharply diminishing marginal utility from consuming at the restaurant, such that a permanently lower price would not increase profits), however the regular clients only get this cheap meal once – and then go back to paying full price. This case makes sense as long as the increase in profit from the one-off customers exceeds the loss in profit from the discount on the regulars.
The third case involves a prisoners dilemma. In this case, if a firm puts themselves in the book they can stir up extra business – however this eats into the business of other firms that provide the good/service. If the book generates very little extra business for the industry type (eg restuarants) but being in the book provides a strong return for an individual business we may end up with a case where a whole bunch of businesses are putting themselves in the book, and offering discounts, even though as a whole they would be better off if the book did not exist.
Now can anyone else think of other reasons why firms would place themselves in an entertainment book?