A recent article in Bloomberg BusinessWeek discussed how in contrast to past generations, American seniors currently make up one of the wealthiest segments of the US population. According to Bloomberg, a combination of strong saving habits (honed from having lived through the Great Depression) and advantageous timing (having come of working age just after WWII as the US economy was booming) lead to the current, and unique, phenomenon in which the elderly are financially far better off than their children and grandchildren.
A similar 2012 article in Time Magazine, citing data from the Pew Research Center, summed up this divergence:
“After adjusting for inflation, the median net worth for households headed by adults 65 and up was 42% higher in 2009 than their counterparts in 1984…The typical younger American, by contrast, has gotten poorer, with median net worth for households headed by someone under 35 decreasing 68% between 1984 and 2009.”
One interesting implication of this new reality relates to an economic concept known as price discrimination. Price discrimination describes a firm’s strategic decision to sell its product(s) for different prices to different consumers, based on each consumer’s (or more often, each segment of consumers’) willingness and/or ability to pay. In economics, this “willingness to pay” is referred to as WTP. Since rational firms strive to capture as much of the economic “welfare” as possible when transacting in the marketplace, when able, they will lower prices to those who have a lower WTP and raise prices to those with a higher WTP.
An extremely common example of price discrimination involves movie tickets. The lower prices for children, students, and seniors relative to the price for a standard adult ticket is not magnanimous, but instead reflects the calculating business acumen of whomever started the policy. By lowering prices for seniors, theaters seek to entice sales that would not otherwise occur, while at the same time maintaining the standard pricing for those whose WTP is sufficient to be willing to pay the higher price. This form of selective pricing ultimately leads to higher “seller surplus” and greater profits for the firm. However, this logic is predicated on the outdated notion that seniors, being less financially comfortable, have a lower WTP.
Armed with a thorough understanding of this economic principle and the current economic strength of the elder population, the rational pricing strategy for movie theaters nationwide would be to raise prices for seniors, arguably to a price that is even higher than that paid by younger, and poorer, working age movie goers.