Why Popcorn Costs So Much At the Movies? And all about Theatre Economics

I recently visited my neighborhood theatre for the latest Blockbuster. I paid $8 for a ticket and headed towards the concession counter. The friendly staff quoted me these prices and I quickly grabbed a combo and walked in

Popcorn (M) - $6
Popcorn Coke Combo - $8
Coke (S, M, L) - $1.8, $2.5, $2.8

As an economist, prices have always fascinated me. After the movie, I asked some friends what they though about these exorbitant prices at the cinemas. Their response was quite unanimous. Monopoly and lack of competition resulting in insanely high profit margins. Since, customers have no choice once they walk in a theatre, they are forced to buy popcorn and cola at whatever prices the theaters charge.

But is that all? Are the cinemas really exploiting customers? What's the real economic intuition behind high popcorn prices? 

A Theatre's revenue is driven by 3 main sources- Movie Tickets, Concessions and Advertisers. Revenue generated from tickets have to be shared (in an predefined revshare split) with the movie studios. With movies becoming increasingly expensive to make, and add to it the operational expenses and cost of maintenance etc, the margins for theaters on the reasonably priced ticket sales alone is quite insignificant.

To stay profitable, more and more theaters are opting to show Commercial Advertisements before start of the movie. However, these ads compete for airtime with the studio ads (movie trailers), which traditionally have always been free and encourages repeat viewers to the theaters for new movies.

Now let's focus on concessions, the expensive popcorn, cola, etc. which in most cases have profit margins as high as 900%. This profitable price discrimination strategy is also know as "Metering Price Discrimination", where the theaters shift their margins from tickets (primary product) to concessions (secondary product), to incentivize the marginal customer (the undecided viewer) thereby increasing the movie attendance. It is a really efficient pricing strategy since the loss of consumer surplus from high prices on concessions is offset by the immense gain in surplus from increasing viewership. Had the tickets been more expensive less people would have got a chance to watch a great movie.

Implicitly, prices reflect the consumer's willingness to pay for a good. If there are people still buying popcorn at movies, it signals their high perceived value for the popcorn be it just as a means of satisfying hunger or enhancing their movie experience.

Hartmann and Gil presented these findings in their paper titled “Why Does Popcorn Cost So Much at the Movies? An Empirical Analysis of Metering Price Discrimination.” 
Concessions were found to be purchased in greater amounts by customers that place greater value on attending the theatre. The benefit to the general consumer is that the price for the primary product, the ticket, remains relatively low.

I have often cribbed about the expensive popcorn but on the hindsight, cheaper tickets and an option to not get the popcorn next time, is more favorable versus high ticket prices. Eventually, everyone wins, theaters remain profitable, Society enjoys high consumer surplus and we all get to watch amazing movies at the cinemas. So what do you think?

Credit: http://www.filmjournal.com/filmjournal/content_display/columns-and-blogs/snack-corner/e3i724486204375a106d0fbded728e3de60
Image Src: http://news.everest.edu/post/2009/09/movies-on-a-budget