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.


Unknown said...

Interesting post on a relevant issue - at least for me it is. I like the explanation that cinemas raise the price of popcorn in order to compensate for the little money they make from selling tickets, given up to 70% of ticket revenues goes to the cinema studios. Indeed, the demand for movies is probably elastic. There might be some movies that you 'should watch' on the big screen (Maybe James Bond or Interstellar?), for which fans are willing to pay high ticket prices (so price inelasticity). However, probably these movies form a minority, whereas most people would not want to pay that much for watching it in cinema. These movies, that can be watched at home for a far lower price, will probably have more elastic demand, especially given the fierce competition cinemas face from Netflix, HBO and (illegal) downloading.

However, I am not sure whether I completely agree with the fact that 'owners manage to keep these prices high not only because they have a monopoly within the movie theater, but also because the 'popcorn lovers' still are willing to pay the price.' How is this exactly a contradiction? The fact that there are 'popcorn lovers' reveals that there is a high inelastic demand for popcorn. The cinema, who has a monopoly on popcorn, exploits this demand by asking exorbitant prices. If there would be competition, then the price would most probably be much lower. Furthermore, if there would be no 'popcorn lovers', i.e. if demand would be more elastic, than cinemas would not price their popcorn so high, because that would lead to a smaller total revenue. So I don't really see the contradiction.

Simon van der S.

Lisa Day said...

Great post - it is outrageous how extortionate the price of popcorn at the cinema is! I agree with your argument that the fact prices are able to be set so high is because the cinemas act as a monopoly for providing popcorn. In addition, I agree with you that they then set the price so high in order to make up for loss revenues on ticket selling. However I think you could have made the mechanism between your three arguments more clearer. Cinemas are able to set the prices so high because they rely on the fact that popcorn lovers are willing to buy it at these prices and the fact that they are the monopoly their prices are not forced down because of competition. In addition, I think you argument on why popcorn lovers will buy the popcorn at extortionate prices could be stronger. The University of South California conducted an experiment where they gave movie goers a bucket of popcorn, which was either fresh or stale, just before a screening. They found that individuals who habitually ate popcorn would eat the same amount of popcorn whether it was fresh or stale and those who didn't were much less likely to eat it stale. It also didn't even matter if they were hungry or not before the film. So I think you could have added that they are willing to pay a high price to sustain their cinema habit rather than for the actual product itself.

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