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I have seen some arguments claim that movie theater popcorn is expensive because the theater acts as a monopolist. However, this is only true after I have paid for a movie ticket. Before entering the theater I can choose among theaters and compare the opportunity costs of my movie-going experience (which would include the utility of consuming popcorn after its cost).

So why do movie theaters have popcorn prices substantially higher than marginal cost in a competitive market? I believe Steven Landsburg analyzed this in one of his Armchair Economist books in case anyone has that handy...

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migrated from economics.stackexchange.com Apr 27 '12 at 10:27

This question came from our site for economists and graduate-level economics students.

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For what it's worth, the book "Why Popcorn Costs So Much at the Movies" utterly fails to answer the question posed by the title. –  EricLaw -MSFT- Nov 5 '11 at 15:07
    
Congrats for asking such a popular question - I think we now know what our market wants ;) –  Turukawa Nov 5 '11 at 15:46
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@Turukawa - HackerNews picked up the post, that's probably why: news.ycombinator.com/item?id=3198646 –  Quant Guy Nov 7 '11 at 0:51
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@Turukara - also someone reposted question on Quora: quora.com/… –  Quant Guy Nov 7 '11 at 22:32
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“Before entering the theater I can choose among theaters and compare the opportunity costs of my movie-going experience (which would include the utility of consuming popcorn after its cost).” — You can, but hardly anyone does. People don’t evaluate entertainment that way. –  Paul D. Waite Nov 13 '11 at 13:36

20 Answers 20

up vote 36 down vote accepted

One explanation is that movie patrons are considering their total willingness to pay for the movie experience so that if the ticket price plus the market price of popcorn is less than their willingness to pay (WTP), the theater has an opportunity to extract more consumer surplus by charging higher than market prices for the popcorn (that is, price discrimination).

There is a working paper on the subject by Gill and Hartmann (2008), the abstract of which reads:

Prices for goods such as blades for razors, ink for printers and concessions at movies are often set well above cost. Theory has shown that this could yield a profitable price discrimination strategy often termed “metering.” The idea is that a customer’s intensity of demand for aftermarket goods (e.g. the concessions) provides a meter of how much the customer is willing to pay for the primary good (e.g. admission). If this correlation in tastes for the two goods is positive, a high price on the aftermarket good allows firms to extract a greater total price (admissions plus concessions) from higher type customers. This paper develops a simple aggregate model of discrete-continuous demand to motivate how this correlation can be tested using simple regression techniques and readily available firm data. Model simulations illustrate that the regressions can be used to predict whether aftermarket prices should be above, below or equal to their marginal cost. We then apply the approach to box-office and concession data from a chain of Spanish theaters and find that high priced concessions do extract more surplus from customers with a greater willingness to pay for the admission ticket.

Locay and Rodriquez (1992) make a similar argument in a JPE article. They essentially argue that purchases of things like movie tickets are made by groups; once individuals are constrained by the group's choice, the firm has additional market power:

We present models in which price discrimination in the context of a two-part price can occur in some competitive markets. Purchases take place in groups, which choose which firms to patronize. While firms are perfectly competitive with respect to groups, they have some market power over individual consumers, who are constrained by their groups' choices. We find that firms will charge an entry fee that is below marginal cost, and the second part of the price is marked up above marginal cost. The markup not only is positive but increases with the quality of the product.

The quote you are looking for is similar, and again attributes the discrepancy to price discrimination. From the Armchair Economist (p. 159):

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.

That is, some people like popcorn more than others. The latter idea is that the movie experience for popcorn lovers is worth more than the sum of its parts: that a movie ticket + popcorn is worth more than either of them separately for some people.

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I'm a complete noob. I assume WTP = willingness to pay? –  neontapir Nov 5 '11 at 3:38
    
@neontapir Yes, correct. For consumers who purchase a good, WTP is always at least equal to the price. The consumer surplus derives from the difference between the price and WTP. –  Jason B Nov 5 '11 at 5:14
    
I'm going to assume the role @gsk3 played in another comment, and ask how this connects with the competitive thread in the OP? I'll venture a guess that you might say that the popcorn-eater can price the popcorn plus the ticket across theaters and pick the cheapest bundle, which doesn't preclude "metering" behavior on the supply side. –  jrhorn424 Nov 10 '11 at 4:09

A multiplex is a concession stand which happens to show movies in order to lure you into range of the smell of their popcorn.

It has nothing to do with movie theater monopolies. As it was explained to me by my manager, back when I worked in a movie theater in a small Midwestern chain, for every movie, the studios take some percentage cut of gross ticket sales, varying from movie to movie. Star Wars: The Phantom Menace in 1999 was the first film for which the studio demanded 90% of gross ticket price — continuing a long-standing trend of raising the take which possibly began with the original first Star Wars movie. The other studios quickly followed suit and raised their take to 90%, especially for the big blockbusters — the textbook term is "oligopoly pricing" — and since then the percentage has inched ever closer to 100%. I forget exactly what it was on the second Matrix movie or Lord of the Rings: Return of the King, both of which premiered while I was at the theater, but the number that sticks in my head is 94%. Obviously the studios can't directly capture any revenue from the sale of popcorn — unlike the movie, it's not their product — so every time they raise their take, the theater compensates for lost revenue by raising the price of popcorn.

This trend hasn't reversed with 3D and IMAX and all the new technologies coming down the pike. The only reason they're attractive to the theaters is that the theater can charge $15 a ticket rather than $10. Even on a small percentage share, that's a 50% jump in revenue, and covers the not insignificant cost of the projection equipment. 3D is also currently getting more butts in seats than 2D was, leading to somewhat more concessions sales — going to the movies is an outing and an event again — though that's tapering off as it becomes less and less of a novelty. The ticket prices aren't coming down, though.

Moral of the story: like razors or printers, theaters lose a ton of money to show you movies due to studio oligopoly pricing, and make it up on popcorn.

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Great explanation, but still doesn't explain the demand side of things. –  gsk3 Nov 5 '11 at 16:57
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@gsk3: Every single movie theater has that issue. –  Seun Osewa Nov 7 '11 at 3:56
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@SeunOsewa My point is that just because a movie theater apparently needs to make up the money in particular way doesn't mean that it can. How it winds up pricing given some change in cost structure will depend on its own elasticity but also on that of the consumers. –  gsk3 Nov 7 '11 at 4:11
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If there is no downward price pressure from other theaters (who are working under the same cost/revenue structure) the entire industry works like a monopoly despite no tacit collusion. In a way it is like a cartel of the unwilling. –  JohnFx Nov 14 '11 at 15:00
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Seems like if the % of ticket sales go mostly to the studios that theaters would have an incentive to lower the cost of tickets to nearly nothing to bring in more people and sell more concessions. But that doesn't seem to be the case either. –  Eric Petroelje Apr 27 '12 at 20:14

To add to Jason's answer; a further mechanism is that of monopoly rents which you mention in your question. Movie theatres are often in shopping complexes (which themselves may offer a particular cinema exclusivity), or physically remote from each other, making price comparison more difficult. Different companies may not offer the same movies (similar to the way phone companies offer difficult-to-compare contract pricing).

Once you've paid for your movie ticket, if you're suddenly thirsty or peckish, the theatre is the only place selling snacks. Many theatres (including film theatres) discourage (or refuse) patrons from consuming products purchased elsewhere on site.

A sense of "capture" is reinforced with ticket collection at the entrance or some form of barrier (inside vs outside the cordon).

A theatre can thus capture their patrons and then leverage that access in order to discriminate amongst the higher-paying consumers mentioned by Jason.

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Movie theater popcorn concessions are not really a competitive market.

  1. They have a monopoly on popcorn within the theater itself. If multiple concession stands in the theater competed for business, prices would drop.
  2. Most decent cinemas are, at best, a duopoly in your city and most are owned by the same set of companies, so prices reflect the pack of theater choices.
  3. Last I heard, theaters lose money on ticket sales much of the time, which is the most visible price to the consumer. They depend on massive profit margins on concessions. This is the same reason that restaurants charge $2.50 for a $0.02 glass of tea.
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None of this answers the fundamental question, which is why consumers don't jointly optimize over two related goods (ticket, popcorn) at the time of ticket purchase. –  gsk3 Nov 5 '11 at 16:56

I think this question has more to do with the business model of cinema. If I remember correctly. Most of the money from ticket sales goes back to the studios. Something like the newer a movie is the greater percentage goes back to the movie studios and the older a movie is the greater percentage of ticket price goes to the cinema. So high priced popcorn and candy is often the only place where the individual theaters make any money. This may not be true for every movie but I believe it was the case for films like James Cameron's Avatar.

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It's called extracting consumer surplus.

Basically I have a bunch of movie goers (who have paid a lot for their tickets). Some of them don't like popcorn, and some do. Of the people in the latter group, there are some who are willing to pay a lot for it. That's partly because I have a select group (rich movie goers) and partly because some of these people would be willing to pay more for popcorn with a movie than without.

If I were just selling "popcorn," I'd have to charge a competitive price. But I'm really selling movies, which have more than covered my costs (rent, heat, etc.) So my costs of selling popcorn are less than that of a non-movie popcorn seller, and I don't really "need" to sell it. Ironically, it means that I can "take my chances" and sell a relatively small amount at a high price, thereby maximizing my UNIT profit. I don't mind having people NOT buy popcorn because I've already made my profit from them with the movie.

From the point of view of the consumer, most consumers see popcorn as an "afterthought." They will seldom think, "I can buy popcorn $2.00 cheaper at Theater A than Theater B, and there's a 20 percent chance that I will want to buy popcorn, so Theater A is 40 cents ($2.00*.20) cheaper than Theater B." Instead, most make the decision to buy the popcorn after they've arrived at Theater B, because it as "impulse item."

And even if they do the "40 cents" calculation, Theater B might be selected because other factors (convenience, location, etc.) outweigh the 40 cent extra cost of popcorn (purchased "sometimes"). Put another way, the cost of popcorn is (usually) heavily discounted because of its "remoteness" to other facets of the decision.

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That doesn't explain the competitive aspect which was the focus of the question. That is, a competitor that is equal in all else besides popcorn. The point of the question is that movie-goers have the opportunity to discover (research or remember) popcorn prices before they purchase their ticket and choose a theater accordingly. –  NickC Nov 8 '11 at 0:37

With all due respect to economics everywhere and the armchair economist. I think they overlook one very basic fact. The alternative to buying popcorn at the cinema is buying it cheaper at the store, or making your own and bringing it to the cinema. Cinemagoing is something you tend to do with a date (and sometimes your friends) and who wants to look cheap to their date (and perhaps their spouse/friends) bringing popcorn to the cinema? This "cheapo-gentlemens" effect together with convenience is probably the reason why popcorn can remain so expensive at cinemas.

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Interesting angle. I think it still fits within the price discrimination framework since the utility of the ticket + (legit) popcorn > the utility derived from the goods separately (that is, they are complements). Your "cheap-gentlemen" effect would be one reason for this complementarity. It would be a really great experiment to see what college guys would pay for something with vs. without pretty women around. –  Jason B Nov 5 '11 at 19:29
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Also, movie theaters usually don't let you bring your own food –  Lagerbaer Apr 27 '12 at 15:14
    
Where I live, movie theatres DO let you bring your own food. And the popcorn is still expensive. –  David Wallace Apr 4 at 22:15

Theaters make pennies off the tickets if any money at all. Their profits come from the concession stand. If a theater priced their popcorn 50 cents less than a nearby competing theater the few if any customers that notice and seek those small savings would be far less than the losses due to charging less. They compete to get you there: providing better sound systems, seating, screens -- even taking a loss on tickets with special deals (like Tuesday bargains). Once inside profit is made by customers willing to pay the concession price premium, and sour patch kids for 15 cents more isn't going to be a deal breaker.

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In my experience, there's usually only one or two theatres within a small city. Maybe a few more in larger cities, but those are also larger areas. So there really isn't much competition.

Sure, there are other places to get popcorn, but not movie theatre popcorn. It won't be lathered with 4000 calories worth of tasty butter and salt. Even if you make it at home that can be difficult to accomplish (and then you have to invest the time to make it).

Besides, when I go to the movies, I don't go just to see a movie. If I just want to see a movie I can watch it at home. The junk food they sell is part of the experience. Even then, people do smuggle their own food into theatres all the time - but it's hard to smuggle in a bag of popcorn, and again, ordinary popcorn just isn't the same.

So, I think the answer boils down to: it's expensive because people are willing to pay for it. And they're willing to pay for it because it's not really available elsewhere at any better price, and it's part of what they come for.

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You're looking at this too rationally. People can not resist eating junk food, especially when they have to sit for 2-3 hours to watch a movie. It's pure biology, not economics. People don't always act according to economic logic.

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Btw, popcorn cannot be classified as junk food as it has a certain nutritional value. –  phaedrus Feb 11 '12 at 4:48
    
So does french fries and potato chips. –  Hisoka Feb 11 '12 at 5:10

I think a labor management issue explains the high cost of popcorn. Some weeks theaters are loaded with patrons and other weeks there are many fewer patrons. If popcorn were priced so that most patrons bought some the theater manager would have to have lots of employees to sell popcorn on the really busy days. The manager would have to cover the cost of wages on the slow days. A simple solution would be to adjust employee hours. To a certain extent I suspect this is done. If you look at the situation from the standpoint of the employee being sent home early or being told not to work tomorrow or, perhaps for the next week because the theater has a bunch of bombs, is not a good situation. A job in popcorn sales is probably not a high paying job so the employees may just quit and they may do this, not by giving notice, but rather by not showing up for a scheduled shift. The result of this is that managers determine the maximum number of employees they can hire if there theater has low drawing movies and they set the price of popcorn so that when the theater is filled this number of employees will not be overwhelmed by patron buying popcorn. At least not to the extent that the start of the movie has to be delayed.

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It is curious that at this time there are five answers whose cumulative votes a negative number. Other than an answer that was deemed too short there is no explanation for why people think the answers are poor answers. –  Jay Apr 22 '12 at 2:04

I'm kind of shocked that no formal behavioral modeling has been proposed as an explanation yet.

One such model would be steep (hyperbolic, quasi-hyperbolic) discounting. Consumers would rather pay for popcorn later than for an expensive movie ticket now. For instance, consumers might when purchasing the ticket see a low value of popcorn and view the ticket price as the whole price because they do not predict purchasing popcorn. Then when entering the theater, the present value of popcorn is very high and they purchase it. There might therefore be a market for a commitment device (such as a popcornless theater) to make the appropriate decision ex-ante. Another commitment device that seems to be practiced is when individuals sneak their own popcorn into the theater. They may not actually want the popcorn, but by bringing their own they ensure they do not purchase the theater's.

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I wonder if this is why many theaters have the box office in a separate space from the concessions... so ticket buyers don't smell popcorn (thus reminding themselves of the additional expense). Only after purchasing the ticket are they herded past the concessions and doused with popcorn scent. –  Jason B Nov 5 '11 at 21:21
    
@JasonB That's a really nifty idea. I wonder where one could find data on concession-ticket booth distances? :-) –  gsk3 Nov 5 '11 at 22:28
    
@gsk3 - look up "mall theory" - stacks of research on how to structure a mall; also consider the way retailers place and stack shelves, aisles and check-out areas. There's an awful lot of behavioural economics in this area... –  Turukawa Nov 9 '11 at 20:00

John R. Lott, Jr. and Russell D. Roberts argue that popcorn in movie theaters has a price commensurate with its much higher cost. See also Lott's criticism of the Gil and Hartmann paper.

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Interesting...thanks! –  Quant Guy Nov 6 '11 at 21:02

The cost of the popcorn is simply the hidden extension of the price the consumer pays for the movie ticket. Similar to the tips in the restaurant. And movie theaters do not compete by lowering the unit price. Instead to maintain the revenue per customer they try to offer more value - bigger screen, better sound, more comfortable seats, etc. That is why the price of the popcorn just like the price of the ticket itself does not go down in the competitive market.

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In the theater, it's a person who can afford to buy expensive pop corn, cause he can buy the expensive movie ticket too... Also sitting at one place will make him feel hungry and buy something to eat... So maximum chances are that in the theater, that guy is your potential customer...

Otherwise if the popcorn seller is somewhere outside the theater, they may charge you less. That's because of a different target audience...

They would be targeting anyone who comes near the theater, who would not be willing to pay for expensive snacks or movie tickets... So very few customers around will be actually potential customers... To maximize their profits, they will keep the prices low and supply as much as they can... I know this is going against the normal Price Elasticity of Demand and Supply graph, but if the prices are low there will be high demand, so if the PED is more than 1, the supplier should supply as much as they can, to maximize profits...

Its all based on the target audience... That's what I think should be the case of expensive popcorn in movie theaters...

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It's because true competition does not exist in the movie theater business. If you wanted to open up a competing theater whose competitive advantage was cheaper popcorn, you couldn't do it - the studios would never give you rights to screen popular new release movies.

I know this because there are indie movie theaters that constantly struggle to acquire screening rights, because the Regals and AMCs of the world work hard to maintain their monopoly by having exclusive licensing deals with studios. Effectively, studios and a couple major theater chains have gotten together and agreed to fix the price of popcorn.

So if you want cheaper popcorn, there are theaters where you'll find it - you just won't be watching Hollywood blockbuster new releases while you're eating it.

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A better question would be to ask "Why don't movie theaters charge to use the bathroom?", or "Why don't movie theaters charge for parking?".

In America, either government regulation or the mall itself forbids charging for parking, or limits the amount that can be charged for parking. This tends to be more true in suburban areas where land is cheap, but less true downtown in cities. The nearest theater to me is in a mall that is also on a metro line. Those who arrive by metro to see the movie are effectively subsidizing those who arrive via automobile and park.

I don't know of any place in America that charges to use the bathroom, but the practice is still common in Europe. I saw the second The Matrix film in Brussels, and had to pay to pee. I'm not sure why this isn't the case in the U.S. Maybe there are widespread regulations against this. Or maybe it's a cultural thing, that we would be so offended by this that we would never go back to the theater.

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Typically in the US Bathrooms that charge are available to the public. In the theater you have to get a ticket to get in to where the bathroom is. But yes there are pay toilets in the US. –  user4127 Nov 7 '11 at 16:27

I think because that high price and the fact that you anyway have a limited time to buy it before the movie starts maximizes their revenue.

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While many answers correctly cite the effect of monopoly power.... there is a cost issue that no one has yet posted. I first recall seeing this cost effect in a managerial econ textbook, perhaps Ivan Png's.

The theater must clean up the popcorn mess. The sales of popcorn elsewhere does not usually include the costs of disposal because that cost is not borne by the vendor. In a theater the cost of disposal -- which is a variable cost depending on the amount and type of foodstuff sold -- is borne by the vendor, who must pay employees to clean up between shows and at the end of the night. While most people are responsible with popcorn, there is a long tail of more and more costly messes left by the customer... and if the theater shirks the cost of cleaning the messes then rats with long tails will bite into future customer demand for tickets.

Whether this cost effect is as large as the monopoly power effect and the synergy in willingness-to-pay between entertainment and refreshments is not clear. All of these effects may be in operation.

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People have moods, that mean they don't have the same level of demand for luxuries every day. There might be some days when I'm feeling a bit poor, or feel like I need to save money, and the price I'm prepared to pay for a box of popcorn might be 50c. There might be other days, for example, the day after I receive my wages, when I feel rich and I don't care how much I spend on things. On such a day, the price I'm prepared to pay for a box of popcorn might be $10.

Now, when a supermarket sells popcorn, they're not really able to price discriminate between these two groups. People come through their doors in all kinds of mood, so the profit-maximising price for popcorn is going to be somewhere in the middle.

But the only people who go to a movie theatre are people who are already in the right mood to spend money on needless luxuries. So the very fact of being in a movie theatre means that a popcorn stall, whether affiliated to the theatre or not, is open only to the high-spending end of the market. They have already caught me when I'm in the mood to spend, so their profit-maximising price will be much higher than that of the supermarket.

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