1. Analysis of Royal Theater’s Practice of Showing Commercials Presenters: Dr. Chapman and Dr. Rogoff 1

2. Agenda Background: Chapman The Case for Fraud: Chapman Survey Goals: Chapman Survey Results: Chapman Ethical Issues: Chapman Strategic Issues: Chapman Conclusions: Chapman Recommendations: Chapman 2

3. Background A Patron is dissatisfied – Sat through 20 minutes of commercials before the movie started Allegation of fraud on Royal Theater’s part Threatens to file class action lawsuit. 3 Speaker: Dr. Chapman

4. Misrepresentation vs. Fraud Fraud distinguished from misrepresentation Prima facie case for fraud 4 Speaker: Dr. Chapman

5. Prima Facie Case for Fraud A plaintiff alleging fraud must prove: A representation was made The representation was false When made, the representation was known to be false The plaintiff relied on the representation The plaintiff REASONABLY relied on the representation The plaintiff suffered damage (economic loss) as a result 5 Speaker: Dr. Chapman

6. Justifiable (Reasonable) Reliance Reliance must be reasonable – Starting time specified in: Newspaper ad Marquee Employee Movie ticket – General public knowledge 6 Speaker: Dr. Chapman

7. Damage – Economic Loss Damage resulting from reliance – Opportunity cost - 20 minutes of lost time Nominal Punitive Damages 7 Speaker: Dr. Chapman

8. The Case for Fraud Conclusion: – First four elements easy to establish – Difficulty establishing reasonable reliance and damage – Tommy HAS A WEAK case for fraud. 8 Speaker: Dr. Chapman

9. How Widespread is Discontent with Commercials? Your theater’s reputation and financial viability depend on your patron’s opinions of this behavior. Objective – estimate the percentage of all theater patrons resenting commercials. – If less than 5% resent the commercials, Royal Theater should consider going to trial and defending any lawsuit. – If between 5% and 20% resent them, cut showing time of ads by 50% provided Tommy files lawsuit. – If more than 20% resent the commercials, Royal Theater should consider settling with Tommy and discontinue ads. 9 Speaker: Dr. Chapman

10. Interpretation of Survey Results A survey is a sampling of the population. Out of 100 responses: 12 patrons or 12% resent the commercials. – We can be 95% confident percentage of moviegoers who resent commercials is between 5.6% and 18.4% – Results indicate that Royal Theater should cut showing time of ads by 50% if Tommy files lawsuit. 10 Speaker: Dr. Chapman

11. Ethical Issues Decision to state movie starting time as 1 p.m. Traditional View - Costs vs. Benefits Impact of decision on STAKEHOLDERS: patrons, owners of theaters, employees 11 Speaker: Dr. Chapman

12. Costs Potentially agitated customers Potential legal liabilities Perception of “tricking” a captive audience to increase revenues 12 Speaker: Dr. Chapman

13. Benefits Increased revenues Public service announcements Buffer grace period Entertainment 13 Speaker: Dr. Chapman

14. Ethics Summary Tommy’s case for fraud is weak, but Royal Theater should be prepared to respond. Royal Theater is behaving in an ethical manner, but opinions of patrons must be considered for longer term viability. 14 Speaker: Dr. Chapman

15. Strategic Thinking The Whole Picture: Long term changes in business environment that could affect Royal’s profitability: – Consumer attitudes about commercials prior to films – Competing forms of entertainment – Competing theatres – Changing demographics – Changes in government regulations A Sense of Direction: All of these could impact future decisions to show commercials. 15 Speaker: Dr. Chapman

16. Long Term Recommendations Consider changing theater operations to avoid future lawsuits and attract more patrons – Advertise movie starting times more clearly. – Reconsider the number of commercials shown before each movie. – Treat consumer complaints courteously – Consider innovations to bring in more customers 16 Speaker: Dr. Chapman

17. Addendum: Confidence Interval

19. Interpretation of 2 nd Survey Results Out of 300 responses: 60 patrons or 20% resent the commercials. – We can be 95% confident percentage of moviegoers who resent commercials is between 15.5% and 24.5% – This answer extends across two of the decision rules: either cut the ads by 50% or discontinue ads entirely and settle with Tommy. 19 Speaker: Dr. Chapman