25 Nov 2015

Why is popcorn sold at the price of gold at movie theatres (and how the obvious answer is inaccurate)

Juliana writes*

Cinemas make 85% profits on overpriced soda, candy and popcorn. Some Americans consider cinema popcorn as the biggest rip-off, since it is on average sold for nine times its cost of production. In fact, in recent events, a citizen from Michigan, even sued a cinema owner for overcharging spectators 5$ for a portion of popcorn. Since then, numerous theater directors and economists have argued that it was simply the result of microeconomic tendencies and that it’s entirely right to sell overpriced popcorn. The question is, can such prices be justified? Why is popcorn so expensive at the movie theater? And how come some clients are still willing to buy popcorn from these stands?

The obvious answer is: popcorn is abnormally expensive in movie theaters, because once inside, the owner has a monopoly. This allows him to decide on the prices he wants to sell his products (price maker) rather than adapting to the market (price taker) simply because he has no competition. Therefore if he wants to charge a bag of popcorn or nachos for 10$ and finds a client, he can sell it for 10$.

Still, there are no too strong incentives that justifies buying popcorn at exorbitant prices. So what is it? The first explanation is price discrimination. Expensive popcorn finds costumers because ‘popcorn lovers’ are actually willing to pay popcorn (whatever the price) because they esteem it will improve their time at the theater. Spectators come to the cinema because of the reasonable or low price of the tickets but ‘popcorn lovers’ increase their entertainment by consuming costly popcorn. “Popcorn lovers value the trip to the theatre more than other people and thus, via the popcorn pricing strategy, they pay a higher price.” (Richard B. McKenzie)

The second explanation is that movie theaters make up for their loss in revenues with the sales of secondary products. Indeed, up to 70% of the ticket price geos to cinema studios. And in order to be able to project their movies (since they have such high demands) have strict requirements which forces the owner to project their movies a certain numbers of time over a certain period, even when the number of spectators is negligible. The forced projections are non rentable (costs of exploitation) which means that the cinema owner is losing money. Instead of raising their prices, which isn’t appealing and uncompetitive, they raise the price of popcorn and emphasizes on advertisements that make it seem that popcorn is inseparable from cinema experience.

Bottom line: Spectators make extensive complains about the exorbitant prices of popcorn at movie theaters. However, owners manage to keep these prices high not only because they have a monopole within the movie theater but also because the 'popcorn lovers' still are willing to pay the price. There are victims of psychologic and economic phenomena they are unconscious about.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.