The popcorn puzzle, an empirical investigation

I've lately found a new empirical paper on why popcorn is so expensive in the movie theater.  The authors are Ricard Gil and Wesley Hartmann.  Here is the abstract:

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.

In other words, price discrimination is one (not the only) plausible rationale for why popcorn is so expensive at the movie theater, relative to marginal cost.  For other MR posts, on this problem, type "popcorn" into the MR search box on the left hand side of the page.

Comments

Tyler, no surprise. Businesspeople are in the business of extracting as much surplus from customers as possible. We know that competition is a way of limiting each seller's market power. Anyone that has taught IO knows the many ways that the "structure" of competition limits sellers' market power.
Now let's change to businesspeople/politicians that are in the business of extracting as much rent from citizens as possible. We know that competition could limit each politician's rent-seeking power. Anyone that has taught PC knows the many ways that a "constitution" attempts to limit politicians' rent-seeking power.
The main difference between the two situations is enforcement. In IO we assume that once a "structure" has been imposed (we don't analyze how; we assume it's exogenous), its rules are enforced at zero cost by some mechanism (usually the law and the judiciary). In PC, we also assume that the rules of an exogenous "constitution" are enforced at zero cost, but we know that enforcement mechanisms may be quite expensive and therefore it is not a reasonable assumption.
Before reading your post I read about last night meeting of EU leaders to deal with the threat of a much larger fiscal crisis within the Eurozone. One word came to my mind repeatedly when reading about this meeting: enforcement. The past few weeks several economists (sorry I think many are jokers disguised as economists) have been talking about big reforms of the financial system of developed countries and the Eurosystem as if any new rules could be enforced at zero cost. They often ignore the rules of the existing systems because they are eager to show their ingeniouness, and in particular they ignore the many problems to enforce existing rules. They talk with the certainty of experts that have never had to solve a problem --as Tom Sowell used to say with the certainty of an intellectual writing about how to milk a cow but one that has never milked one.
Have a good day.

Yup - this also means presumably that the revenue maximizing ticket price could be much higher and that concession revenues are being directed away from the movie studios in some sense.

This reminds me also that restaurants with wine lists are excellent surplus extractors.

Tyler, let me follow up my earlier comment with a story of how upset Germans are about something that happened last Thursday night. That night, rather than enjoying popcorn at the theatre, the Mayor of Athens, Greece, had an expensive lobster risotto in one of Greece's best restaurants and a German journalist reported on how much the Mayor had enjoyed it. At the same time as the Mayor was enjoying his risotto, people were in the streets protesting the fiscal adjustment and in the ensuing fighting with the police three protesters died. Also, at the same time, German politicians were discussing how much assistance Germany will give to Greece. Indeed it looks like the Mayor had a free risotto.

Does this imply that I'm being "subsidized" because I don't buy popcorn at the theatres? Don't tell my local theatre, but I usually just buy a box of candy at the local CVS before heading to the movies. Wouldn't behavior like that (i.e. availability of cheap alternatives) make price discrimination very difficult to sustain?

No surprise. This is standard IO and standard marketing.

Now, figure out what pricing strategy you should have for a Coke, a complement, depending on the intensity of consumption of salted popcorn. [Hint: large popcorns are often consumed with another person.]

Here's what I'd like to know: why are the secondary concessions stands never open? It seems like every theatre built since 2000 has one in each wing, but I've never seen one selling anything. If they are never utilized why are new theatres still being built with the additional stands?

Film exhibition is an industry that sells branded sugar waters and starches that are consumed as drugs to accompany hormone raising projected images and blasted sounds in a group setting.

Excuse me, fellow armchair theorists, but I believe there is less going on here than we all are wont to believe. Movie theaters make almost nothing on their ticket sales. Overpriced concessions constitute almost all of their net revenue. It takes about one week of working for one of these organizations, and a few questions along the way, to unearth this elusive truth. I'm not sure we need discrete-continuous models. Academic "research" of this kind is clearly beyond the point of diminishing returns.

The paper also mentions that Spanish movie houses were facing a very tough competitive market. Consolidations etc were occurring. Since the authors talk about moving their analysis to other markets, lets look at airlines.

Read the whole post. There is some really insightful information here. thanks

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