CGV’s Tiered Pricing Backfires – Or Does It?
CGV’s Tiered Pricing Backfires – Or Does It?
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  • 승인 2016.09.18 21:35
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 Last March 3, CJ CGV introduced a new price system that earned people’s widespread outrage. By categorizing the seating into Economy Zone, Standard Zone and Prime Zone and the time into Morning, Brunch, Daylight, Prime, Moonlight, and Night, CGV now provides a wider price range, if not a simpler one. Despite CGV’s explanation – front seats avoided by the audience now command a different, more attractive price from the popular rear seats – and the expansion of online and mobile discounts, the consumers stand with crossed arms and knitted brows. They argue that CGV’s price differentiation is an expediential markup and some even went as far to suggest a boycott. As if to reflect said consumer reaction, words such as “hate”, “unpleasant”, and “unfair” were mentioned repeatedly in interviews with Sogangers.

Customer Complaints
 When asked to elaborate on their discontentment, five main points arose. Firstly, the Economy-to-Prime ratio is considered too low. For instance, the cinema 1 B3 of CGV Sinchon Artreon has 56 Economy seats (26.74%) and 106 Prime seats (36.81%) out of 288 total seats. Almost twice as many Prime seats as Economy seats explains why consumers focused more on the price increase than its variation. The small difference between Economy, Standard, and Prime Zones is also a source of discomfort. Paying a different price from the person right next to one is, while common in airplane rides, musicals, and concerts, an uncommon practice in the movie industry, and thus harder to accept. The consumers are also used to increases in prices being accompanied by improvements in goods or services, which did not happen with CGV. The price differentiation was entirely and solely dependent on the location of seats, without further changes on theater services. Moreover, some consumers argue that location is a faulty determinant of Economy, Standard, and Prime Zones at best. Depending on the size or form of cinemas, front seats may offer better view or sound than rear seats, a complexity CGV disregarded completely. Instead, it implemented an indiscriminate seat categorization.

 The Grasshoppers are another – perhaps expected – problem. The Grasshoppers have found a loophole in the new system, and they exploit it to watch premium while saving economically. They first buy a Prime seat. Then, minutes before the movie starts, they get a refund and buy an Economy seat. Based on the fact that it is unlikely that the Prime seat will get bought in such a brief period of time, the Grasshopper enters the cinema with an Economy ticket, and watches the movie in the Prime Zone. Such selfish and shameless acts make a fool of CGV and the audience who pay their rightful fee. Yet the lack of an effective prevention method for such Grasshoppers remains as another problem.

… Leading to no Boycott
 For aforementioned – and many more unmentioned – reasons, moviegoers have directly and indirectly expressed their dissatisfaction with the new price system. Petitioning at their local CGV, filing a complaint with the Fair Trade Commission, litigating public interest, and petitioning for legislations were among the weapons the customers wielded, yet they failed to use their strongest – boycott. Suggestions of boycott were made, surely; but it failed to materialize. Kim Jung-won (16, Economics) said, “Once you decide on watching a movie, the ₩1000 difference between prices does not seem significant. I just thought I’d pay ₩1000 more and watch in a better seat.” Another student, Seong In-chang (16, Economics) remarked, “Even with the tiered pricing of CGV, a Prime seat on a Saturday night costs about ₩11000, which is same to Lotte Cinema’s ₩11000 and just ₩1000 more than Megabox’s ₩10000. There is really no reason to go to another multiplex.” The lack of brand diversity stands as another difficulty for boycott. CGV is the largest multiplex cinema chain, with a market share of 48.1% in this year’s first quarter, which is much higher than Lotte Cinema’s 30.3% or Megabox’s 18.1%. Customers have little to no say on the choice of multiplex, as they are often forced to go to the only cinema in their neighborhood – CGV.

 CGV’s recent performances further testify the lack of boycott. Since the establishment of price differentiation, its stock prices had its ups and downs – but eventually the ups have more than covered the downs. Its total sales have also increased. 2016’s first quarter sales increased by 22.3% from that of last year; second quarter sales, by 14.5%. The price differentiation may have had a hand in the sales figures. The boycott did not, being too small – if not nonexistent – to affect the conglomerate.

Economic Perspective
 Yet there are always two sides to every coin, and looking at CGV’s decision from a different angle often reveals better information or fuller consideration that obliges us to change opinions. Economics is one such angle. According to classical economics, CGV’s new price system is an effective price discrimination that succeeds in offering different prices to people with different willingness to pay. Some are willing to pay more for a better seat; some are willing to accept a front seat for a better price. By diversifying its prices accordingly, CGV can now attract those who would not have watched a movie with a flat, one price system and increase their revenues. Surprisingly, price discrimination is a win-win game for both CGV and the moviegoers. Price discrimination effectively captures a larger portion of the total market surplus, or the benefit of consumers and producers. The additional surplus occurs in the form of added profit of CGV. But with a method to fairly distribute this profit between suppliers and consumers, tiered pricing may be a true win-win system.

Different Takes on Rationality
 An interesting study from Richard H. Thaler’s Misbehaving: The Making of Behavioral Economics may provide further information behind CGV’s decision. The study went like this: the morning after a blizzard, a hardware store selling snow shovels raises the price from 15000 to 20000. Is it fair? People hated it: 82% said it was unacceptable. But what about a more narrowly defined group of people? When asked the same question, 76% of MBA students replied a markup was acceptable. Of course, this should not come as much of a surprise as different courses have different correct answers. Life – in its broadest sense – teaches us to think one way while Economics and Business Administration teaches us otherwise: the principle of profit maximization. No wonder opinions of board of directors – with their years of business training – and customers often differ. With this in mind, CGV’s new price system and customers’ dissatisfaction with it may be not only a divergence of views but also of the way they were taught to think. How can one, either as a consumer or as a producer, be sure he or she is on the right? What may be rational for one may be an act of outright consumer deception.

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