Chris Forsman, a Sales Consultant and Sage Value Pricing Boot Camp Graduate with Accounting Micro Systems in San Francisco sent me an interesting article from Physorg.com, “Why Does Popcorn Cost So Much at the Movies?”
Before you go read the article, attempt to answer the question. Think about it, real hard. Hint: the answer is not obvious.
This is actually a topic that, believe it or not, had been studied by Walter Oi, an economist, for an article from the Quarterly Journal of Economics dating back to 1971.
I’ll freely admit that I’ve built a career out of asking and answering this question. Educated by the books written by Steven Landsburg and David Friedman—which ask and answer this provocative question along with many more—price theory had never come more alive for me.
Now I look at the world through an entirely new prism, trying to detect how companies practice what economists call price discrimination. It’s ubiquitous, as long as you understand the theory.
Here is how I answered the question, with the help of the brilliant Steven Landsburg, in the first chapter of my book, Pricing on Purpose:
Why don’t we observe movie popcorn price wars, similar to what other industries engage in from time to time? When asked this question, the overwhelming majority of businesspeople will answer because there is no competition—the movie theater has a captive audience. Other common explanations include:
- Limited selling time
- High fixed cost of operating concession stand
- It is how the theater owner makes a profit
- Higher clean-up costs imposed by snack eaters
- Tastes and smells better than you can make at home
- Part of the experience of seeing a movie
- Because people will pay for it
At first glance, all of these answers appear reasonable, except to an economist. The most popular response—captive audience—leads to the question of why there are no pay toilets in the theater? You are certainly a captive audience in that regard, but perhaps theater owners understand if they installed pay toilets they’d lose at the box office what they made from the bathrooms.
The high fixed costs, in terms of scarce square footage, equipment, fixtures, clean-up costs, and required employees is certainly a plausible reason, but does not really account for the large premium price of popcorn.
To say it is where the theater owners make their profits is definitely true, but begs the question of why they don’t make the profits from ticket sales and sell more popcorn at closer to cost?
Eating popcorn is certainly part of the experience of going to the movies [it began in the 1930s if memory serves], and people will pay for it, yet this explanation is still incomplete.
Assuming theater owners want to maximize their profits, what do the theater owners know the rest of us, perhaps, do not. The consummate economist Steven Landsburg provides the answer in his witty book, The Armchair Economist:
I believe he knows this: some moviegoers like popcorn more than others. Cheap popcorn attracts popcorn lovers and makes them willing to pay a high price at the door. But to take advantage of that willingness, the owner must raise ticket prices so high that he drives away those who come only to see the movie. If there are enough nonsnackers, the strategy of cheap popcorn can backfire.
The purpose of expensive popcorn is not to extract a lot of money from customers. That purpose would be better served by cheap popcorn and expensive movie tickets. Instead, the purpose of expensive popcorn is to extract different sums from different customers. Popcorn lovers, who have more fun at the movies, pay more for their additional pleasure.
This answer is more precise, since the important point is that “some moviegoers like popcorn more than others,” and the theater own cannot separate these customers when they are outside queuing up for the movie. A method was needed to separate the snackeaters from those who just want to watch the movie, which the concession stand provides since it allows customers to divide and self-identify themselves.
This may seem a subtle point, but it is highly profitable, since segmenting different types of customers allows the theater owners to charge them varying prices depending on the value received.
Students, children, and people with large families are usually more price sensitive, and not likely candidates to spend money on snacks. The theater owner doesn’t want to turn these customers away, and hence keeps the box office price lower by charging higher prices to snackeaters.
What you are really buying when you purchase a movie ticket is an opportunity set&mdash:a chance to enjoy the movie, or to enjoy it with popcorn. Economists call this a two-part tariff, defined as a pricing strategy in which the customer must pay a fee in exchange for the right to purchase the product. Examples abound of this strategy: country clubs charging membership fees and monthly dues; Gillette charging for the razor then the blades; amusement parks charging an entrance price followed by a price for each ride.
Some people recoil at the thought of price discrimination—charging different prices to different customers—claiming the practice is blatantly unfair and should be illegal.
But what would happen if the practice were outlawed? Theater owners, airlines, restaurants, and a myriad of other businesses, would have to increase prices for the very customers who are least able to afford a higher price—children, students, large families, senior citizens, etc.
By engaging in price discrimination, businesses are actually increasing social welfare and making more products and services available to the poorest members of society.
This is not to imply price discrimination based on race, gender, religion, or ethnicity, but rather based upon ability and willingness to pay. As this book will prove throughout, this practice is ubiquitous in any economy, and most price theorists agree it has a salutary effect on societal welfare.
If you found this answer for why movie theater popcorn is so expensive thought-provoking, welcome to price theory. The German poet Goethe thought double entry bookkeeping “Among the loveliest inventions of the human mind.” One should say the same about price theory, as it truly is “one of the great products of the human mind,” as economist Deirdre McCloskey explains in her textbook, The Applied Theory of Price:
The theory of price is one among the larger intellectual achievements of the nineteenth century, such as the theory of heat engines, the decipherment of hieroglyphics, the professionalization of history, the invention of abstract algebras, and the theory of evolution. Price theory explains much human behavior.
Since price theory offers tremendous insight into human behavior, it is worth the time and effort to study it in greater depth. It is sometimes said economics is nothing but refined common sense, which is certainly true.
Yet many myths about this crown jewel of the social sciences persist, even among businesspeople.
This is why those who study price theory in-depth reach entirely different conclusions about how businesses price their products and services. The economist’s toolbox is incredibly useful for deciphering how the world works.
Now that the theory has been explained, here’s the article first referred to above. It doesn’t refer to the 1971 article, but this is obviously not “new research.”
Still, it’s incredibly fascinating.