In Hong Kong, seats in cinemas are divided into sections depending on how close they are to the screen and how comfortable the seats are. As expected, better seats command higher ticket prices. Very often, the better seats are sold out when there are still cheaper seats left. And ticket scalping of better seats is quite common. Why don't cinema operators charge higher prices for the better seats and capture the consumer surplus themselves? Are better seats under-priced?

One very important consideration in determining the prices for different seats is the enforcement costs of seat rights. When the prices for better seats are increased, some of the better seats may become vacant. Knowing this, customers who otherwise would buy tickets to the better seats might decide to buy cheaper seats instead and move to the better seats once the movie starts – a sight not uncommon to many of us! This opportunity for switching seats would lead to more of better seats left unsold than the simple operation of the price elasticity of demand would indicate. In such cases, the goal for the cinema operator being wealth maximization, the least costly method of enforcing seat rights is to make sure that the better seats are fully, or almost fully, sold so that the mere presence of seated customers wards off prospective seat switchers. This goal can be achieved by reducing the price of the better seats, thus leading to “underpricing.” Another way to reduce seat switching is to decrease the number of higher priced seats by simply moving the dividing line between the better seats and the inferior ones. Generally a combination of the two is implemented, so that the better seats have a greater tendency to be sold out, generating the impression that they are underpriced.

The tradeoff between greater volume and higher price will ultimately depend on the popularity of the movie. If the cinema operator anticipates poor attendance, he may find underpricing (and/or decreasing the number of higher priced seats) the easier and less expensive way to ensure that the better seats are filled up, rather than erecting barriers or conducting routine checks to keep people from cheating. On the other hand, if the cinema operator expects a popular movie to attract a large audience, he may, to maximize revenue, hike the prices of all seats, or even decrease the number of low priced seats by simply drawing the dividing line forward.