THE DEMAND FOR CINEMA

IN THE UNITED K I N G D O M
Samuel Cameron

Introduction
Demandfunctions for leisure activities such as sport (Cairns,
Jennett & Sloane, 1986) and theatre-going (Moore, 1968,
Withers, 1980, Kelejian & Lawrence, 1980) have been estimated by
economists. Relatively little work has been done on the cinema
(Spraos, 1962, Cameron, 1986, Cameron, 1988). cinema attendances
have fallen rapidly since the 1950's. As this accompanied a rapid
growth in incomes we might suspect that the cinema is an inferior good.
Higher income may have caused a switch to activities such as opera
and ballet which might be superior goods (Browning & SorreU, 1954,
Halsey, 1972, Throsby and Withers, 1979). Household expenditure
survey data for Australia (Throsby & Withers, 1979, p.104) and Great
Britain (Cameron, 1986, p.52) shows a consistent increase in spending
on cinema attendance as income rises suggesting that it is a normal
good. Attempts to isolate the income elasticity of demand for cinema,
using econometric methods, have failed to find anything of statistical
significance whether using cross-section data (Spraos, 1962) or time
series (Cameron, 1986, 1988). This paper uses pooled cross-section
time-series data which provides a well defined positive income elas-
ticity so long as a log-linear functional form is used.

The Demand For Cinema Tickets

Microeconomic theory suggests that the demand for cinema tick-
ets depends on ticket price, the prices of other goods, income and
tastes. This would suggest modeling the impact of television through
its price. This is unhelpful because televisions are durables from which
we receive a service flow in the form of programs. The service flow
increases as new stations etc., are added. Price can remain constant

35
whilst access spreads due to a diffusion process (Bain, 1964) which has
been likened to the spread of infection in that people are more likely
to obtain a set the more other people have one until satiation is
achieved. The level of demand at an individual level will depend on
whether or not the individual has a television. Market demand will
depend on the stage of the diffusion process that has been reached.
One might argue that fdm quality should appear in the demand func-
tion as it is not necessarily adjusted for in the price. It is simply
impossible to measure temporal variations in film quality given the data
available to us. To the consumer, the range of films available at a point
in time may be seen as a dimension of quality. This can be proxied by
including the number of cinemas in the demand function.
Allocation of time theory (Becker, 1965) may provide a more
appropriate framework than traditional consumer theory with the cost
that there are fewer unambiguous predictions. Here, consumption is
made up of activities requiring inputs of market goods and household
members' time. The constraint is given by non-labour income, time
available and the market wage which is equivalent to the value of time.
Wage rate changes bring reallocation of time between activities due to
income and substitution effects. Rising wage rates induce substitution
away from time-intensive activities like cinema going (assuming f'rced
coefficients household production functions). However, the income
effect of rising wages will increase time spent cinema going if it is a
normal activity. Given that aggregate wage rate movements are highly
correlated with income, any sign for the income elasticity is plausible.
The rest of this paper proceeds in terms of the representative
monopolistic cinema. Spatial differentiation will make cinemas into
local monopolists even if they show identical films. Market demand is
thus deflated by the number of cinemas to give the demand function
facing the representative monopolist. The equation is therefore:

(1) (ATT/CIN)q = atj + btj (Pc/P)tj + ctj (RPDI/POP)tj

+ dtj POPtj + etj CINtj + ftj COLtj + utj

Above, we assume linearity (other forms will be considered in the

empirical work). The variables are ATT = total tickets sold, CIN =
number of cinemas, COL = number of colour televisions, Pc = ticket
price, P = general price level, RPDI = real personal disposable
income, and POP = total population. The symbols a to f denote

36
parameters while t is time, j is region, and u is the disturbance term.
The first two variables give the conventional demand curve with the
assumption of homogeneity of degree zero in prices imposed. The d
parameter is expected to be > 0 as it captures aggregate potential
audience while e is expected to be > 0 as it is attached to a proxy for
the quality of substitutes. The fparameter is expected > 0 as television
ownership causes substitution way from time intensive pursuits.

Supply Considerations
Let us consider the pricing decision of cinemas. Eight simplifying
assumptions are made: (1) cinemas operate in local markets hence they
do not spend funds attracting customers from further afield; (2) profit
maximization; (3) the venue has no alternative uses; (4) all revenue is
from ticket sales; (5) there is no price discrimination; (6) exclusions,
due to censorship, are a fairly constant percentage of total showings;
(7) additional viewers are at zero marginal cost; and (8) quality varia-
tions and non-price competition are ignored. If we accept these
assumptions and solve the firm's problem of maximizing profits subject
to the stipulated demand curve then the following reduced form is
obtained:

(2). Pc = 1/2b [a + c(PDI/POP) + dPOP + eCIN + fCOL + u]

Note that in the above, we drop the subscripts and assume the price
levelis fixed (hence PDI, personal disposable income replaces RPDI).
Given that the underlying demand curve, used to derive (2), is linear,
(2) will be satisfied where the price elasticity of demand equals one(l).
Also, tickets sold will equal half the number demanded at zero price.
In this scenario the demand curve is unidentified as firms would only
ever operate in the middle of it. It is thus impossible to estimate
regardless of the technique employed; (2) could be consistently es-
timated but we could not unravel any quantity-price relationships.
Identification is possible if we add the assumption of ad hoc pricing
where changes in price are by some rule of thumb. Most cinemas form
part of a chain which, although not charging the same price everywhere,
applies the same price for the same film in widely differing demand
conditions.
Price is unlikely to be held down to forestall entry as it is not
possible to purchase an independent cinema and compete effectively

37
with the chains as they bar large showings of new major films outside
of a limited circuit (Monopolies and Mergers Commission, 1983).
Cinemas will close if costs become so large that equilibrium price
implies negative profits. They may close with positive equilibrium
profits if alternative uses of the site offer a better rate of return.
Closures depend therefore on costs, demand and alternative rates of
return. It is assumed here that the decision to stay open is a function
of some moving average of lagged demand. Thus, the demand for
tickets is part of a recursive system. The number of cinemas appears
in our demand equation but is treated as exogenous because of the
dependence on lagged demand. Under appropriate assumptions about
the disturbance term consistent estimates of (1) can be obtained.(2)
In brief, our assumption is that identification is possible because firms
are not precise profit maximizers although they are interested in
increased profits and do, at some points, take steps to increase them.
Given our assumptions, OLS estimates of the demand curve should be
efficient.

Descriptive Statistics
The data used is for the period 1966-1983 for the standard regions
of the U.K. with Greater London replacing the South East as a whole.
Descriptive statistics are shown in Table I. Prices are fairly similar by
region although those in Scotland,Wales and the North are notably low
and those in greater London extremely high. The low prices probably
reflect a persistence of small independent cinemas which have been
killed offin most regions. Their lowprices reflect a discount for poorer
facilities and older films as the new releases are restricted to the major
chains. The trend in attendance appears fairly similar for all but the
southern regions where the decline is somewhat smaller. The trend in
closures is much more dispersed. The high closure rates in Scotland
and Wales reflects the elimination of the small independents as con-
sumers become more indifferent to re-runs as the impact of television
heightens.

Estimation and Results

The sources in Table I were used to estimate the demand func-
tion.(3) We could not obtain data to measure the impact of the colour
television variable. As a proxy a dummy trend = 10 for 1966-1970 and
increasing by 1 per year through 1971-1983 was used. This was chosen
on the assumption that black and white television usage had reached
saturation by !966. Colour television sets first became widely available

38
 TABLE I: DESCRIPTIVE STATISTICS

REGION STATISTIC

Attendance Attendance Cinemas Relative Fall Fall Growth

Per Cinema Per Capita Per Price Cins. Att. in Real
(thousands) 100K. (%) (%) Personal
Pop. Wales =100 Income

North 85.9 2.6 2.9 111 48.3 89.3 38.4

Yorkshire 88.5 2.2 2.4 122 26.8 83.1 30.9

& Humberside

East 81.9 1.9 2.3 122 38.2 84.1 34.9

Midlands

East Anglia 80.9 2.4 2.9 128 37.3 76.3 31.5

Greater 138.5 4.4 3.3 172 16.5 76.1 46

London

South West 72.6 2.3 3.1 128 19.3 79.5 31

West 102.3 2.1 2 122 34.1 86.4 39.5

Midlands

North West 92 2.4 2.6 122 20.5 86.1 37.1

Wales 60.6 2.7 4.4 100 57.6 86.5 37.3

Scotland 91.4 3.2 3.5 117 58.3 86.5 40.9

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes.
1. Items (1)-(4) are arithmetic means of annual data for 1966-1983;
(5)-(7) are calculated from the total change 1966-1983 expressed as a
percentage of 1966 figures.
2. Personal Income is expressed as personal disposable income per head.
3. Sources: Population figures - Population Trends; dnema figures - Annual
Abstract of Statistics; Prices - Economic Trends; income figures - Regional
Trends. All are published by Central Statistical Office of the U.K.
government.

39
in 1971. The estimate of f will reflect the impact of any unmeasured
trend variables given the construction of COL. Expectations of the
parameters are as follows. Relative prices should be a negative in-
fluence due to substitution. Income per head is indeterminate in an
allocation of time model. Studies of other time intensive leisure goods
have suggested that they are superior goods having income elasticities
greater than one. The number of cinemas will have a negative impact
due to redistribution of clients among firms.
Estimating (1) raises certain problems. These problems include
choice of parameter restrictions, functional form, and validity of the
assumptions about the disturbance term. Some parameter restrictions
are necessary as (1) could not be estimated as there would not be
enough degrees of freedom. The usual assumption of constancy over
time is adopted. This leaves us with variation of the intercept and slope
parameters by region to consider.
The variance components model, in which the intercept varies
randomly by region, was rejected on pragmatic grounds. Thus we end
up with a fixed effects model in which all regions have the same time
invariant response to the regressors but have different intercepts.
These intercepts represented in the pooled regression by regional
dummies. The estimated fixed effects capture unmeasured items such
as quality differences or regional taste differences which some (Allen,
1968) have claimed are important. The significance of the frxed effects
was tested by calculating the F ratio for the hypothesis that all regional
dummies in equation (1) of Table II are equal to zero. This gave
F(9,165) = 24.4 which is significant at the 0.1 percent level.
We began with a linear functional form. This is unlikely to be
satisfactory given the construction of the television variable. The
dummy trend used to proxy it would be expected to be non-linear given
that it captures the move from diffusion to saturation of the television
effect. The basic linear model (not reported) shows a statistically
significant negative income effect. When the dummy trend is trans-
formed to natural logarithms the income effect becomes significantly
positive. The latter equation was preferred to the fix'st on the grounds
of a bigger R square. The log-linear functional form was considered on
the grounds that all of the variables may have a non-linear effect and
may well be interactive. A likelihood ratio test indicated that this was
preferred to the linear model with log dummy trend. It should be
pointed out that the log-linear model parameters are unaffected by the
choice of deflator. The underlying model is one of aggregate ticket

40
 TABLE II: ESTIMATES OF THE FIXED EFFECTS
MODEL OF THE DEMAND FOR CINEMA TICKETS
Specification: Double Log (Multiplieative) in all eases.
Estimation: OLS GLS(UWAR(1)) GLS(WAR(1))
Dep. Var. Log(ATT/CIN) Log(ATr/CIN) Log(ATr/CIN)
.................................................................................................

Independent Variables
Intercept - 10.9 -4.02 -5.3
(3.8) (0.7) (0.8)
North 0.3(33) -0.17 -0.06
(1.7) (0.5) (0.1)
Yorkshire & -0.05(-5) -0.11 -0.09
Humberside (0.9) (I.4) (0.9)

East Midlands 0.09{9) -0.22 -0.14

(0.7) (1) (0.5)
East Anglia 1.1 {181) 0.24 0.45
(3) (0_S) (0.5)
Greater London 0.5(62} 0.72 0.66
(6.8) (2.9) (2.1)
South West -0.01 {0.5") -0.21 -0.16
(0.1) (1.4) (0.9)
West Midlands -0.1 {-9} -0.14 -0.11
(1.8) (1.9) (1.I)
North West -0.3(-28) -0.12 -0.16
(3) (0.7) (0.8)
Wales 0.08{6.2} -0.43 -0.32
(0.4) (1.1) (0.6)
Log(rel.priee) -1.6 -1.54 -1.53
(9.3) (8) (8)
Log(Real Income 1.4 1.52 1.41
Per Capita) (4.6) (5.2) (4.8)
Log(Population) 1.4 0.57 0.73
(4.3) (0.9) (0.9)
Log(Number of -0.004 -0.004 -0.004
Cinemas) (6.8) (5) (3.8)

Log(Dummy trend)-0.34 -0.35 -0.33

(11.3) (11.3) (10.7)
.........................................................................................................

R2 Adjusted 0.93 n.a. n.a.

Note: The figure in brackets is the net percentage differential over Scotland.
Its method of calculation is explained in the text.

41
sales. Deflation by cinema gives us an average firm function whilst
deflation by population gives us an average household function. Writ-
ing the functional form as
(3) A T T = a P O P b CIN c Z d
where Z stands for allother variables.Then, divisionby P O P gives
(4) A'l-'r = aPOP b'l CINc Z d
and division by CIN gives
(5) A T T = a P O P b CIN c'lZ d.
Thus the other parameters are unaltered. To get the impact of CIN
on total attendance in the second case we add 1 to its estimated
coefficient. The same calculation will give us the impact of POP on
total attendance in the first case. The paper reports only the log linear
estimates. The parameter estimates on the dummy variables in an
equation with a log dependent variable are biased estimates of the
percentage change due to the dummy. A correction for the bias due
to Kennedy (1981) is to use
(6) G* = exp [lo- 1/2 V(b)] -1
as the percentage differential where b is the estimate of the dummy
variable parameter and V its variance.
The net percentage differentials by region in Table H a r e calcu-
lated by this formula. An examination of the sign pattern of residuals
was chosen as a diagnosis of the preferred equation. The pattern is
displayed in Table III. This table could be used to generate non-
parametric tests for serial correlation such as a Chi-square or a runs
tests. These are hardly necessary given the clear strings of positive and
negative residuals indicative of positive serial correlation. A GLS
method of estimation (Kmenta, 1971) was used to adjust for this. This
is a two-stage process. In the first, rho were estimated for each region
by regressing its residuals, from equation (1) in table II on their lagged
values. The original equation was then transformed to express as
follows: M*t = Mt -rho(Mt-1) where M is a variable in the equation.
All variables (including the regressand) were transformed in this way.
This is referred to as the UWAR(1); unweighted autoregressive (first
order) equation. The results of estimating the transformed equation
are shown as equation (2) of Table II. This equation was further
adjusted for heteroscedasticity by weighting the observations. The
weights are derived from estimating the sample variance of the error
term for each region. This amounts to imposing the assumption that

42
 T A B L E III: S I G N P A T T E R N O F R E S I D U A L S F R O M O L S E S T I M A T E S

Scot. North Yks. E.Mds. E.Ang. Gt.Lond. S.West W.Mids. N.West Wales

1966 + 4. 4- - 4- + 4. 4. 4-

1967 + 4- 4- - - 4- 4- 4- +

1968 + 4- 4. o ~ 4. + 4.

1969 + 4. +

1970 +

1971 + 4- 4- 4- 4. 4- 4- 4. +

1972 + + + + + 4. + + 4. +

1973 + + 4. 4- 4- 4- 4- +

1974 + 4-

1975

1976

1977 + ~ +

1978 + 4. 4- + + + + § + +

1979 4- + 4. + + + + + 4-

1980 4. 4- + + + + 4-

1981 4- 4- + 4- + 4- 4- +

1982 +

1983 9

43
each region has a constant error variance which differs between
regions. This is termed the WAR (1) model: weighted autoregressive
(first order). The GLS estimates are reported without an R square as
the transformed equations no longer have a constant term. In any case
a weighted log dependent variable regression has an essentially mean-
ingless R square.
The GLS estimates bring little change in the point estimates of the
elasticities for price, income, number of cinemas or the dummy trend.
The t ratio on the population variable is much smaller. The t ratios on
the regional dummies are now insignificant except for Greater London
which has increased. Given the results for the regional dummies we
experimented with dropping them from the WAR (1) model with the
following results:

(ATT/CIN) = 0.12- 0.23 (Pc/P) + 1.04 (RPDI/POP) + 0.35 POP

(2.5) (2) (4) (6.7)
-0.44COL - 0.001 CIN
(14.5) (1.9)

where figures in brackets are absolute t ratios. A notable change

is the much smaller price elasticity. This suggests that the regional
dummies control for variations in cinema quality and new movie
availability.

Summary and Conclusions

This paper reports a pooled cross-sectional time-series study of
the demand for cinema tickets in the United Kingdom. The results
indicate a large well-determined price elasticity similar to those ob-
tained in Cameron (1986). Interestingly, survey evidence indicates a
strong feeling that cinema prices are high (Docherty et al., 1986, p.85).
Economists would hardly find this surprising as the industry, being
heavily monopolized has an interest in keeping people out in the
pursuit of profit.
A major result of this paper comes from the large highly siL,nificant
income elasticity in light of the poor results of earlier work in this area
(Cameron, 1986, 1988, and Spraos, 1962). The income elasticity seems
high in comparison of similar studies of other leisure time intensive
goods requiring ticket purchase as inputs. For example, for sport,

44
(Jennett, Cairns & Sloane, 1986) most studies fail to include an income
variable or find an insi~ificant coefficient. The exception is Bird
(1982) who obtains a value of -0.6 using a relatively short time-series
for association football. Lange & Luksetich (1984),using a cross-sec-
tion of U.S. orchestras in 1970, find income elasticities in the 0.5-0.7
range which are sip-nlficant at the 5 percent level. Moore (1968) finds
an income elasticity of 1.03 from a 1962 audience survey of Broadway
theatre goers; his time series study of the same market fails to uncover
a significant income elasticity although later work (Kelejian &
Lawrence, 1980) does. But, Kelejian & Lawrence do not provide the
relevant information to calculate the income elasticity from their work.
Throsby & Withers (1979), using U.S. time series for 1929-73, find an
income elasticity of 1.55 for the 1949-1973 period and 0.64 for 1929-
1948, for the performing arts as a whole. Thus our estimates are at the
top of the range being close to those for performing arts suggesting that
cinema going falls more dearly into the same category as more obvious-
ly art related or cultural goods.
University of Bradford

Footnotes
1. Problems arise with non-linear demand curves; with a multiplica-
tire functional form with a price elasticity less than 1, marginal
revenue is always negative so there appears not to be an equi-
librium; with elasticity equal to 1 price and quantity are indeter-
minate; with elasticity greater than 1 there again appears to be no
solution. These problems only arise if we regard the non-linear
forms as the true demand curve rather than an empirical ap-
proximation AND the assumption of profit maximization is
retained. This paper operates on the assumption that firms are
interested in profits but are not precision tuned maximizers.
2. The essential assumption is that the covariance of the two distur-
bance terms is zero.
3. Attendances do not correspond exactly to the concept of demand,
i.e., as with restaurants there is no measure of the unsatisfied
excess demand from those who do not get in if there is a full house.
In the aggregate this is a fairly minor problem given the shift away
from the cinema after the late 1950's.

45
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47