...[M]en are found of paradoxes, and of appearing to understand what surpasses the comrehension of ordinary people...
- Adam Smith [1723-1790]
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 over-whelming majority of business people 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 operation concession stand
- It is how the theater owner makes a profit
- Higher clean-up costs imposed by snack eaters
- Tates 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:
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 a 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 (Landsburg, 1993: 159).
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 self-identity 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; Gillette charging for the razor then the blades; amusement parks charging an entrance price followed by a price for each ride.