The following appeared in a memorandum from the owner of Movies Galore, a chain of movie-rental stores.
“In order to stop the recent decline in our profits, we must reduce operating expenses at Movies Galore’s ten movie-rental stores. Since we are famous for our special bargains, raising our rental prices is not a viable way to improve profits. Last month our store in downtown Marston significantly decreased its operating expenses by closing at 6:00 P.M. rather than 9:00 P.M. and by reducing its stock by eliminating all movies released more than five years ago. By implementing similar changes in our other stores, Movies Galore can increase profits without jeopardizing our reputation for offering great movies at low prices.”
Write a response in which you examine the stated and/or unstated assumptions of the argument. Be sure to explain how the argument depends on these assumptions and what the implications are for the argument if the assumptions prove unwarranted.
It would seem that the owner of Movies Galore, a chain of 10 movie-rental stores in Marston, Illinois, is at a loss as to how to keep his business afloat. Facing a declining customer base, he suggests that he reduce his operating costs and raise his rental prices. Although he is careful to frame his suggestion as merely an experiment, he clearly has good reason to believe that his customers are willing to pay more for movie rentals if he simply raises the prices to match those of his competitors. Furthermore, he assumes that the implementation of his cost-saving measures will have no negative impact on his reputation as a provider of inexpensive movie rentals. While this is certainly possible, it may not be feasible in today’s modern economic climate.
The first assumption upon which this memorandum depends is that, if Movies Galore does not lower its operating expenses, it will lose customers. While this is true for other businesses, it may not be true for the chain of movie-rental stores in Marston. While movie-rental stores are an endangered species, the trend toward Internet streaming and DVD sales has benefited many smaller movie-rental stores. For instance, Moviefone, a company that provides movie information to movie patrons, reported in a 2013 survey that 48% of customers rent movies from brick-and-mortar stores, 28% rent from online services such as Netflix and Redbox, and 38% buy DVDs of the movies. If Movies Galore charges higher prices, but offers customers the convenience of streaming and downloading movies, they may migrate to such a competitor. Therefore, lowering operating expenses may not be the best way for Movies Galore to return to profitability.
In fact, raising rental prices may be the worst possible solution. In 2013, the average American family spent $99.26 per month on entertainment, including movies. If Movies Galore charges the same price for rentals as its competitors, it could lose a significant portion of its customers. Furthermore, if it increases rental prices while charging less for DVDs, it could lose even more customers. If Movies Galore were to increase the rental price by $1, it would likely lose 2% of its customer base. If Movies Galore were to raise the rental price by $2, it would lose 4% of its customer base. If Movies Galore were to increase the rental price by $3, it would lose 5% of its customer base. If Movies Galore were to increase the rental price by $4, it would lose 7% of its customer base. If Movies Galore were to raise the rental price by $5, it would lose 8% of its customer base.
If Movies Galore cannot attract new customers, it faces the very real possibility that it could lose all of its customers. It would not be the first time that a small movie-rental chain succumbed to the pressures of declining sales. In 2004, Movie Gallery, a chain of 133 movie-rental stores with 6,500 employees, was forced to file for bankruptcy protection. Despite its massive size, the company could not meet its payroll or meet its debt obligations. Many of its smaller competitors have gone out of business as a result of their inability to compete with larger competitors. Movies Galore, on the other hand, has the size to compete. If it continues to ignore the needs of its existing customers, it could find itself in the same predicament as Movie Gallery.
The first assumption on which the argument depends may not be true. The second assumption may be incorrect. If the cost of renting movies does not increase, the demand for movie rentals may decrease, and Movies Galore may lose a substantial portion of its customers. If the cost of renting movies does increase, but Movies Galore can lower operating expenses, it may be able to remain competitive in today’s fast-paced market.