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Friday, August 20, 2010

The Arrival of 3-D Movies

In 2010, the median number of days between the US release of a movie and the release of a pirated version was just 21 days (Source: www.waxy.org). Every year, piracy costs the movie industry billions of dollars, costs governments hundreds of millions of dollars in tax revenues, and has resulted in the loss of thousands of jobs. With such rampant piracy and recent difficulty in getting financing for their movies, Hollywood has had a tough few years.

However, with the arrival of 3-D movie technology, things don’t look up for piracy. Because the 3-D experience is so unique, movie pirates aren't enjoying much success in selling 2-D copies of 3-D hits. In other words, the cross elasticity of demand (XED) value of 2-D pirated copies in relation with 3-D cinema tickets is a smaller positive value than the XED value for 2-D pirated copies in relation with 2-D cinema tickets. This means that, in the equation below, an increase in the price of 3-D cinema tickets will bring about a less than proportional increase in the demand for pirated 2-D copies as the two are more remote substitutes than 2-D pirated copies and 2-D cinema tickets were. An example of this lower XED value is the fact that 2-D copies on file-sharing sites didn't hurt Avatar's box-office sales 'at all' (Source: The Economist, 3/8/2010). This clearly shows that those copies were no substitute for the real thing.

XED = Percentage change in quantity demanded of X (pirated 2-D copies)

Percentage change in price of Y (3-D cinema tickets)

This said, as going to watch a movie in 3-D is a luxury, it follows that the price elasticity of demand (PED) of 3-D cinema tickets is elastic. Hence, if the premium of 3-D cinema tickets over 2-D movie tickets was reduced from the currently hefty $3-5 (Source: New York Times), movie-makers' revenues would increase and the demand for 2-D pirated copies would be squeezed further. With technicians in the movie industry becoming more familiar with 3-D equipment and a deluge of new 3-D screens popping up to increase supply, The Economist notes that '(3-D) cinemas could charge a lot less'. When that happens, movie-makers will be laughing all the way to the bank.

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