My use of the word inferior here is in the economic context, not in terms of product quality. In economics, we define goods as either normal or inferior, depending on the way in which income affects demand.  A good is normal if the demand for it increases when income rises. A good is inferior if the demand for it decreases when income rises.

I’m currently working on two papers on motion picture revenues: one on box office revenue determinants and another on DVD revenue determinants. Previous research on VHS rentals showed those to be inferior and that made a lot of sense to me — when your income is lower, you rent more movies. The presumption made here (which I make as well) is that you substitute away from going to the theater or buying a DVD and instead just rent it. But it’s not so clear that’s what’s happening.

The data on DVD revenues suggests that new DVDs are also an inferior good. The data on box office revenue, looking at the last 16 years in theaters (and over 2,000 movies) suggests those are inferior also. Those conclusions didn’t make sense to me at first. I thought: if people are renting more DVDs when income goes down, aren’t they spending less money at theaters and on new DVDs?

Apparently not. The National Association of Theater Owners (NATO) project this year to be a pretty decent one for theaters. They cite the fact that in 5 of the last 7 recessions, box office revenue went up. It appears that people cut back on more expensive things like sporting events, vacations and amusement parks, and take the family to the movie theaters a little more. The effect is not large, but it’s there.

Take, for example, the big Memorial Day weekend at the box office. Last year, total box office for Memorial Day weekend (4 days) was $219 million. This year, it’s $221 million. Ticket prices may be a bit higher, but I think theaters have raised their prices less this year than the standard 4% of the last decade. If ticket prices are up 3% while revenues are only up 1%, that means quantity has fallen by 2%. But that fits the general pattern of the last decade of flat or so of flat if not declining attendance (about since the time DVD players started becoming more affordable). One might reasonably argue that any decrease in tickets sold this year vs. last year are not due to the recession, but rather due to a continuation of a trend toward more home viewing on DVD, Blu-ray, and VOD.

I’m not sure why this inferiority result surprised me, but it did. NATO’s explanation seems to make sense, but it runs counter to what I had thought before running the regressions. I guess that’s why we do the research…

UPDATE: My co-author and I have decided that “counter-cyclical” is a better term for the motion picture industry rather than the standard “inferior.” The word inferior, in an economics context, generally implies that when income increases, the demand for the good falls because consumers are substituting something better instead. McDonald’s sales have done well in the recession, as people substitute cheaper goods (McD’s) instead of more expensive meals out. But that’s not quite what we think is happening with movies. We think it’s more that when the economy goes bad, people have an increased desire to escape their troubles with movies. So when the economy goes bad, box office sales, rentals and even DVD sales go up. It’s not necessarily that when times are good they substitute to a higher quality of entertainment (perhaps they do, live sports maybe…), but they don’t need to escape their life quite so much.