Episode #78: Why Is Movie Theater Popcorn So Expensive? Economic Puzzles and Paradoxes

. . . [M]en are fond of paradoxes, and of appearing to understand what surpasses the comprehension of ordinary people . . .

—Adam Smith 

Why is movie theater popcorn so expensive?

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 that if they installed pay toilets they would 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 do not 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, 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 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 owner cannot separate these customers when they are outside queuing up for the movie. A method was needed to separate the snack eaters 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 does not want to turn these customers away, and hence keeps the box office price lower by charging higher prices to snack eaters.

What you are really buying when you purchase a movie ticket is an opportunity set—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; Gilette 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 myriad 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, and so on.

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 that price discrimination is based on race, gender, religion, or ethnicity, but rather is based on ability and willingness to pay.

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 Donald (now Deirdre) McCloskey explains in his 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 that 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.

Therefore, when trying to answer some of the puzzles and paradoxes Ed and I will present in this series, it’s useful to use the economists’ toolbox in thinking about the issue at a deep level, including:

  • Price Theory
  • The assumption of rationality
  • The subjective theory of value
  • Behavioral economics, and irrationality

Here are some of the other questions we posited on the show.

Why do laundries charge less for men’s shirts than for women’s?

For example, $4.00 for men; $9.00 for women. Is it because when you move the buttons from right to left it costs more?

Is it because women’s blouses are made of more delicate fabrics? But then why not just charge different prices for different fabrics?

Is it because women demand higher-quality work, and require more re-works?

Is it because men’s shirts are machine pressed, whereas women’s are hand pressed? Then why not different prices for different types of pressing?

Why discriminate against women, not men? Men care less, and thus more likely togo without clean shirts? Women could as easily do their own laundry.

Dry cleaners next to each other, if all earning high profits from women, why none specialize in just women (e.g., charge $8 across board to get all womens business, and none of the mens). Yet none have done this? Hence, women’s clothes can’t be much more profitable

Could be due to customer loyalty? To a dry cleaner?

The more competitive an industry, the less price discrimination usually seen (farmers don’t give senior citizen discounts); likewise gas stations—sell at one price to everyone.

Either there is price discrimination, or women’s clothes are more expensive to clean and press, and it’s a cost explanation.

Do companies really plan for obsolescence?

Ed's Light Bulb stash

Ed's Light Bulb stash

Ann Landers use to rail against pantyhose and light bulbs, arguing that companies deliberately made them subject to ruin so they could charge more.

But this is ridiculous. If you have to spend $5 twice a month for pantyhose (or approximately $120 per year for pantyhose), any company would want to engage in only transaction for $120, or even a bit less, then 24 transactions generating the same revenue. It’s the same with light bulbs.

Because most women don’t want to spend $120 for hose they might lose in the laundry, or don’t have $120 in cash now. Thus, the company is actually insuring your risk and/or providing a loan.

If your odds of winning the lottery are approximately the same if you purchase a ticket and if you don’t, why is it rational for people to play the lottery?

Well, it might not be rational. But a lottery ticket is a cheap price to pay for a fantasy.

There’s something to the Endowment Effect here, too. When the lottery was up to $75 million years ago, I asked audience members who had purchased tickets to sell me theirs at 50 times what they paid. There were no takers.

Why do men spend less on medical care than women?

Probably because men are more likely to die violently, and die sooner. Also, women tend to be sick more and more likely to seek medical care. Giving birth is also a factor.

 

Why is milk sold in rectangular containers, while soft drinks are sold in round ones?

Another excellent book that contains puzzles and paradoxes is Robert Frank’s The Natural Economist: In Search of Explanations for Everyday Enigmas.

The book is a summary of questions posed by his economic students, and then the essays they wrote to answer the enigmas using economics. This question is from the book.

Rectangular containers use less shelf space, which is more valuable and costly since it’s refrigerated for milk, whereas Coke can be sold on open shelves.

Also, Coke is easier to hold, since its often consumed from the container.

Economist Russ Roberts interviewed Robert Frank on his podcast EconTalk, where they discussed some more of these economic puzzles.

One of the others they discussed was why the Nigerian Prince email scandal continues to this day, even with all the spelling mistakes.

It’s essentially a targeting device: only the naïve are going to fall for it at this point. It still traps some, so this weeding out is effective.