Why do firms like movie theaters like to charge customers different prices based on things like time of the day?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The reason for this has to do with supply and demand and also with the concepts of fixed costs and variable costs.

Firms charge lower prices during times when demand is low.  A movie theater has the choice between getting more people to come in at a lower price in the middle of the day or having the theater sit empty.  Since there is lower demand, prices must be lowered.

So why not just let the theater sit empty?  A firm will do this if it has to.  However, it is incurring costs even when the theater is not in use.  It has had to pay rent and pay for the cost of the film as well as for other "fixed costs."  If it can show a film in the middle of the day it can defray some of those fixed costs.  Of course, there will be variable costs.  The theater will have to pay ticket takers and such.  However, if it can bring in more in sales than it pays out in "variable costs" such as these, it will come out ahead.

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