Managerial Economics

Assignment

on

PVR Cinemas

Submitted by –
Rishabh Agarwal
17DM185
Cinema Industry
Introduction:
Cinema Industry, the business of distributing and displaying movies in movie theatres. It consists
of single-screen theatres as well as multi-screen theatres. In the recent years, the multiplex
segment (multi-screen theatres) is increasing while the segment of single-screen theatres is
decreasing. In 2016, around 2,260 million tickets were sold making India the highest movie ticket
selling market.

Number of tickets sold in 2016

About the company –

PVR Cinemas is a film entertainment company in India. It began as a joint venture between Priya
Exhibitors Private Limited and Village Roadshow Limited in 1995 with a 60:40 partnership but
could start its financial operations in 1997. The journey from a single screen to 500 screens has
been stupendous. By introducing the multiplex concept in India, PVR Cinemas brought in a whole
new paradigm shift to the cinema viewing experience: high class seating, state-of-the-art screens
and audio-visual systems

In India, PVR cinemas, is the largest and the most premium film entertainment company. PVR
Cinemas has a viewership of around 70 million people across India. The company acquired
Cinemax in 2012 and has recently entered into definitive agreements to acquire DT Cinemas.
Currently, PVR operates a circuit of 593 screens across 129 locations in 51 cities.

PVR Ltd, the integrated 'film and retail brand' has PVR Cinemas as its major subsidiary and PVR
Leisure and PVR Pictures, the other subsidiaries. Moreover, the company aspires to surpass 1000
screens by 2018 across India.

Market Structure of the Industry

NOTE - Considering multiplex cinemas

The Indian cinematic industry has an Oligopoly market structure in which 4-5 players drive the
market. These market players are PVR Cinemas, Big Cinemas, INOX, Cinepolis and few emerging
players.

Oligopoly – It is a market structure in which a small number of firms hold a larger share majority
of market share. It is similar to a monopoly, except that rather having only one firm in the market,
two or more firms dominate the market.

There is no upper limit to the number of firms in an oligopoly, but the numbers must be low
enough so that the actions taken by any one firm significantly influence and impact others.

Screen Share

24%
30%

16%
6% 24%

PVR INOX Cinepolis Carnival Cinemas Others

Screen Share of firms

Features of Oligopoly
The main features of Oligopoly are elaborated as follows:-

1. Few Firms –
Under oligopoly, there are few large firms. The exact number of firms have not being
specified. Each firm contributes significantly to the total output of the industry. There
exists a competition amongst the different firms and each firm try to influence the prices,
selling strategies, volume of final goods produced of other firms.
In India, PVR, INOX, Cinepolis and Carnival cinemas comprise the quartet that has the
footprint across the country.

2. Inter dependence :-
In oligopoly, the firms are interdependent to each other. Interdependence means that
actions of one firms impact and affect the actions of others also. Each firm is large enough
that its actions affect market conditions. Therefore, competitors will be aware of the
firm’s actions and will respond accordingly.
The prices of the movie tickets are more or less same for the different seating segments
as well as the time of the day. Also, the percentage difference between a child and an
adult tickets being almost identical. They may adopt a uniform pricing policy for the film
they screen.

3. Homogeneous Products –
In an oligopolistic market, all the firms are selling the same product. In the cinema
industry, cinemas are running post-release shows of movies and pre-release screening
shows of movies.
4. Competition –
Since, there are few sellers, a move by one seller immediately affects the competitors.
So, the sellers are always alert and keeps a close watch over the rivals in order to counter
the move.
In cinema industry, any up gradation of technology in PVR cinemas may trigger its rivals
to adapt the same technology.

5. Barrier to entry of firms:

There are some types of barriers which prevent entry of new firms into the industry. Only
those firms enter into the industry which is able to cross these barriers. As a result, firms
can earn abnormal profits in the long run.
These may be:
 High capital requirements
  Control over technology
 Legal restrictions :-
The entry of new firms is closely regulated through the grant of certificate by the
government.
 Economies of Scale :-
Extensive economies of scale increase the minimum efficient scale for theatres
which reduces the ability of smaller independent cinemas to compete with the
larger chains.
 Extent of Integration :-
The emergence of the big four is the result of the horizontal acquisitions, which
has significantly increased the level of concentration in the industry. The large
chains are likely to have a very strong relationships with distributors, making it
difficult for independent theatres to enter the market, and obtain the rights to
screen films.

Demand Curve
Under oligopoly, the exact behaviour pattern of a producer cannot be determined with certainty.
So, the demand curve faced by an Oligopoly is non-deterministic. As firms are inter-dependent
to one another, a firm can’t ignore the counter steps from the competitor firms. So, demand
curve keeps on shifting and is not definite. Therefore, the shape of the demand curve is kinked
as shown:

Demand Curve
Determinants of Demand:-
1. Substitutes –
PVR has few close competitors in the Indian market. Hence, when there is an
increment in the price of movie tickets, consumer would search for a cheaper ticket
from another firm and thus substituting PVR.

2. Income –
A consumer’s income will make them sensitive to the change of price. If the price of
movie tickets are very high then consumer may postpone to watch the movie or find
a substitute in DVDs, Internet channels etc. All of these will decrease the quantity
demanded and shift the demand curve leftward.

3. Tastes and Preferences –

Consumers have certain set of choices and standards, the firms need to identify them
and provide the products accordingly. Some consumer may want comfortable, good
sound system, clear video quality, etc.

4. Price of other goods –

The major players have more or less the same price, so, the consumer may not
consider the comparison amongst the firms. Small and independent players may
reduce their prices in the short-run and try to make good profit margins.

5. Advertising –
Today, each firm is spending a hefty sum of amount on marketing to position
themselves as the best option for customer.

6. Price –
The law of demand states that when prices rise, the quantity of demand falls. In other
words, when prices drop, demand will grow. People base their purchasing decisions
on price if all other things are equal.
 The exact quantity bought for each price level is described in the demand
schedule. It's then plotted on a graph to show the demand curve.
 If the quantity demanded responds a lot to price, then it's known as elastic
demand. If the volume doesn't change much, regardless of price, that's inelastic
demand.
 The demand curve only shows the relationship between the price and quantity. If
one of the other determinants changes, the entire demand curve shifts.
 7. Favorable Demographics:
Places with large population will eventually provide major demand to the PVR cinemas
as compared to a place having low population.
Delhi, Mumbai, Kolkata, Chennai, Hyderabad, Bengaluru are some cities that
contribute to the major share in the earnings.

Determinants of Supply:

1. Production/Operating cost:
If the operating cost varies in PVR cinemas then it may affect the supply of output.
For instance, if operating cost rises PVR cinemas may want to not open more screens and
subsequently reduce the supply of product.

2. Technology:
Technology advancements in company like projector up gradation, enhanced sound
systems, 3D screens, laser focus, etc. will increase the efficiency of company which leads
to increase in supply. Also, the outdated technology can also contribute in the decrement
of supply.

3. Price of related outputs:

Consumers tend to have eatables while watching movies. If the prices of food products
are low in comparison with the competitors then consumer will prefer PVR cinemas since
price of main commodity is more or less same. Thus, price of related products can affect
the supply of primary product.

4. Expectations for future prices:

If the expectation for future prices of Honda products is high then company will try to
hold onto their inventories and offer products to the buyers in the future so that company
can capture the higher price.
5. Policies:
Government charges entertainment taxes whose cost is included in the price of ticket.
High taxes will increase the cost of tickets and consumer may try to find substitute. Also,
many times government announce no tax policy for certain movies. The cinemas run more
shows of such movies.

6. Nature of Product:
The nature of product also affects the supply of product. A movie having a wide release
will allow PVR cinemas to run more shows and thus creating more supply of the product.
 A less known movie may be considered on the opposite side of the coin in the way that it
may not get a wide release and hence, the supply will be less.

7. Improving supply of real estate:

The availability of real estate at feasible rates encourages the firm to open more screens.
Opening more screens will allow more consumers to visit at one time. Hence, the supply
of screens increases with the improvement in the supply of real estate.

Challenges to the company

There are certain challenges that the company has to face and which affect the growth of the
company. These are the following -
1. India is severely under-screened.
With just 1 screen per 96,300 residents, it is the world’s most under-screened major
territory. The U.S. has 1 screen per 7,800 residents. China has 1 screen per 45,000
residents. With such a deep shortage of movie theaters and screens, many of India’s
fanatical movie fans are simply unable to see movies in the theater.
2. Competition from single-screen cinemas.
More than 10,000 of the country’s 13,000 screens are single-screen cinemas. The
economics of these theaters are inferior to modern multiplex cinemas and charge very
nominal price than those of multiplex theatres. And because a large section can’t afford
high prices of multiplexes they choose single-screens.
3. India’s film economy is splintered into several regional industries.
Unlike North America, China, and most major territories, where the vast majority of films
are distributed in a single language, India makes and distributes films in more than 20
different languages. The regionalization, and linguistic politicization, of the country’s
movie business saps its overall strength. Average production and marketing costs are
higher and profits are lower than they would be if India’s film industry were more
integrated.
4. Ticket prices in India are too low.
While, it’s true that India’s population is mostly poor, however, it doesn’t justify the
extremely low prices of the movie tickets. It has a middle class of between 50 million to
100 million people who can comfortably afford to pay much more than the average ticket
price of 150 to 250 rupees. Moreover, Government regulations keep prices in some
 regions artificially low; in Tamil Nadu, prices have been fixed at a maximum of 120 rupees
making film production and exhibition there a risky proposition.
5. Taxes are too high. Unlike any other business in India, movies must pay both
an Entertainment Tax and Service Tax. India’s tax treatment puts the cinema business in
a financial chokehold.
6. Piracy.
Piracy has been a major concern for the cinema owners. Pirated copies are available at
very low prices in the market as compared to the ticket price. Consumer may choose
pirated version instead of the original version.
Taken together, these factors constrict India's movie industry so that it functions at just a fraction
of its full potential. With the appropriate and significant action by Government of India, most of
these challenges can be addressed and removed, to allow India's cinema business to perform at
its full potential.

Conclusion –
PVR cinemas has come a long way since its inception in the mid-1990s. Today, it is the largest
multiplex chain having more than 590 screens across India. It has also marked its presence
outside India as well. With the current market structure in Indian cinematic industry, PVR cinemas
has to face a regular and stiff competition from its competitors who are trying to increase their
market structure.
The company can increase the demand and supply of its product by carefully examining the
determinants of demand and supply relating to the company. Also, it need to counter the
challenges that the company is facing in order to effectively increase its efficiency.

REFERENCES
 economicsonline.co.uk/Business_economics/Cinema_case.html
 researchonindia.com
 Economics – Lipsky Chrystal