In a competitive market, why is movie theater popcorn expensive?

http://economics.stackexchange.com/q/437/174

by JeremyBanks • 15 years ago

66 60 15 years ago

economics.stackexchange.com

maratd• 15 years ago

Meh. This one's pretty simple. Ticket revenue mostly goes to the studios. The theater pulls in the cash through the concessions. The cost of the concessions, while high by microwaveable popcorn standards, are highly competitive among their peers.

iradik2• 15 years ago

how does it work? do theaters have to pay per ticket sold, or do they pay a lump sum for the rights to the movie to show it for a period of time?

bitops• 15 years ago

(I worked for Landmark a long time ago, some facts may be rusty).

Theaters bid for the right to show movies, it's an up front cost to then. This cost is recouped primarily through ticket sales. Revenue beyond that is derived from sales of concessions.

This is why big players like Cinemark dominate the landscape. Through economy of scale (# of theaters && screens) they can drive attendance and concessions. Very much a volume approach and so they show they movies that have a broader appeal.

Indie chains like Landmark have fewer locations and screens, but they target metro areas with people who are more into "niche" films. They usually end up charging a bit more for concessions but they make their money through a loyal customer base. So for them it's important to be seen as stewards of good artistic movies.

Yeah, I used to drink the Kool Aid big time. : )

But really, it's hard for all movie theaters, but particularly the art houses.

(That's why the Stanford in Palo Alto is such a treasure. It has wealthy backing and so you get a cheap ticket and cheap concessions. Seeing movies there is a real experience).

starwed• 15 years ago

>The cost of the concessions, while high by microwaveable popcorn standards, are highly competitive among their peers.

I'm 100% unsure of what you mean here. What peers?

klbarry2• 15 years ago

Probably that it is competitive compared to other theaters, which must also pay the bills with expensive concessions.

oacgnol• 15 years ago

Have you ever had really cheap theater popcorn? I think he means other theaters.

TheFuture• 15 years ago

Thank you. I've worked at a theater, and this is accurate.

Amazing the answers you get when you throw a bunch of economist at the question who know nothing about the industry.

barrkel• 15 years ago

That's odd, because the economists are agreeing with you - in your analysis, that is, not in your opinion of economists. But further than that; the microeconomic theories are more generally applicable.

(Me? I hate the stink of popcorn. I'd pay extra to go to a cinema that didn't sell it.)

paulgb• 15 years ago

It's right in the sense that it's true, but it doesn't answer the question. Just because the theater gets most of its money through concessions doesn't automatically mean that concession pricing is exempt from competitive pressure or supply and demand. Of course theaters want to charge as much as they can for their product, as any profit-maximizing firm would, but the question (a good one) is why the market allows it.

waterside812• 15 years ago

You're bang on - all of the economic jargon on the StackExchange page is funny. People are overcomplicating matters. I used to work for the largest theatre chain in Canada and remember that George Lucas demanded 100% of ticket sales for the first 3 weeks of his Star Wars releases (and re-releases), which is unheard of, but he can command that.

Popcorn & soda is where theatre chains make their money. From what I recall the marginal cost of each soda was about $0.25, popcorn is even less.

mattm• 15 years ago

I worked at a movie theatre during high school. On initiation day, as we were viewing the large stacks of popcorn kernels, my manager said the actual cost of a bag of popcorn is around 5 cents.

joezydeco• 15 years ago

There had to be a bit more to the Lucas thing, though. Like a minimum ticket price.

Otherwise I would have (as a theater owner) slashed my ticket price by 99% and doubled the cost of popcorn. Still a win for the moviegoer and theater owner.

miked• 15 years ago

This. I worked for AMC Theaters for 4 years as a developer. One of the wonderful things about that company is that every employee has to go thru a week long training program in the theater business, to include working at a theater.

One of the things I'll never forget is the trainer telling us one day, "We're not in the movie exhibition industry. We're in the snack concession industry. We just use movies to get the patrons in the door."

The reason is that, in the movie industry, the Hollywood studios have almost all the power. When the original Batman came out and lines were around the block, the company actually lost money on ticket sales (after theater costs). That's because Batman cost the theaters 90% of the gross ticket sales.

If the theaters were really making big profits the companies would have margins -- and stock prices -- akin to Apple's. They don't. Check the stock listings: they have a marginal business.

hristov• 15 years ago

Because most people do not consider the price of popcorn when making a decision as to which movie theater to attend.

marshray• 15 years ago

Right, like you're supposed to call ahead and shop around? Or remember the relative prices of the different theaters in your town.

All I remember is that the concessions are ridiculously expensive, the theaters show you ads before the movie, and often Hollywood films have subtle advertisements in the movie itself.

This is why I rarely go to movies. I don't like feeling ripped off.

klbarry2• 15 years ago

It is interesting to me how much a subset of hacker news readers, such as yourself, hate advertising. Many laypeople find the pre-movie advertisements a lot of fun. Heck, my girlfriend prefers TV advertisements to many shows.

robryan• 15 years ago

The other common tactic I see is just not displaying the prices at all.

spullara• 15 years ago

I hope that reading the ridiculous theories by the economists (with the best answer voted down) doesn't look like what an economist sees when they read our analysis of software.

ramchip• 15 years ago

I'm not an economist, but I think the top answer makes plenty of sense. Price discrimination is an important concept for many products: cinemas, bus/train tickets, computers...

Instead of just proposing theories with nothing backing them up, like the answer that's being voted down, the top post refers to people who have actually modeled the problem and checked that their theories explain the data.

archangel_one2• 15 years ago

I tend to agree with the OP on this; the top post cites a lot of complicated language but the conclusion is kind of weak (why do these "popcorn lovers" feel it's worth more to buy it at the movies?). The answer further down that points out that someone on a date buys it there so as not to look cheap is, to me, more insightful than citing a bunch of papers. I guess I find an explanation of why the market will bear the high price at the theatre more interesting than a whole lot of economic jargon around it. Although this is the economics stack exchange thing, so maybe that's what's expected...

albickers2• 15 years ago

Rest assured that is not what we see. I cannot speak for everyone, but most economists wouldn't call your theories "ridiculous" unless they had significant experience on which to base such a claim. I hope they would also back up their "ridiculous" claim with some peer reviewed literature that demonstrates that the theories presented are, indeed, ridiculous. I hope representatives of our profession would be more respectful than that.

freshhawk4• 15 years ago

Of course, it's a little easier to defend "our" theories because they are actually peer reviewed and predictive.

sliverstorm2• 15 years ago

IMO, the movie theater lobby is not a competitive market, and this is why it is expensive.

(This being because people habitually think about food only after they have gone through ticketing and are committed to the movie- and some theaters also disallow outside food)

If you don't believe this theory, then ask yourself why is food sold after ticketing, rather than before?

Jach• 15 years ago

If you just mean that a lobby isn't like a food court where multiple vendors can try and sell you food, I agree it's not a competitive place and ignore the next paragraph.

I think most if not all of the theaters I've been in didn't require a ticket to reach the concessions counter in the lobby, so you could if you wanted buy food there and just leave like any other walk-in fast food place. (Of course the ticket place has been the closest place relative to the parking lot but I don't remember it ever blocking further access.)

The reason for theater non-competitiveness and high food prices has more to do with non-competitiveness in Hollywood, I think. Theaters typically take only 20% or less of the ticket price with the rest going to studios, in some cases depending on the movie (such as Star Wars Ep 2) the studios can demand up to 100%, for the first week or two. (They get more as time goes on but then less people go to see it so it's moot.) Rising costs to make the movies also hits the theaters as studio agreements demand more money. Theater owners are in the candy business, not the movie business.

sliverstorm2• 15 years ago

Don't get bogged down in what profits they do or do not make on the tickets (not that you are wrong). Whether or not they make good money on the tickets, market theory tells us they will sell the candy for as much as they can get away with :)

byoung2• 15 years ago

ask yourself why is food sold after ticketing, rather than before?

At most theaters in Los Angeles, you can go to the concession stand without buying a ticket, and some theaters such as the Arclight actually have nice restaurants and wine bars that cater to people who aren't going to movies at all. That said, I'm not sure who would pay $6 for popcorn and $5 for a soda when not forced to because that is the only option allowed in the theater.

It is the same with beer. You can get beer for $0.50-$1 per bottle at a grocery store, but it is $3-$5 at most bars. Even if California law allowed it, I wouldn't go into a bar for a $5 beer and then take it home. I would only drink the $5 beer in the bar because that is the only option allowed inside.

trackofalljades• 15 years ago

For the same reason porn is expensive inside a hotel, and not elsewhere.

wtvanhest• 15 years ago

The reason that none of the explanations make logical sense is because the theories presented only look at the demand side (Willingness to Pay) but the answer is on the supply side.

The movie theater business is a surprisingly low profit business. Net income accounts for less than 3% of revenue (http://www.google.com/finance?q=NYSE:RGC&fstype=ii)

Theoretically the prices on concessions are already the lowest point possible for the theaters to still make a profit. In essence, all the demand side stuff the authors mention is correct, but they mistook what the actual marginal cost was.

pbreit• 15 years ago

The "competitive market" clause seems like a faulty assumption to me. In most areas, the number of theaters are showtimes are quite limited. And I'm not sure what sorts of entertainment are legitimate alternatives to seeing a movie on the big screen (at $12 for 2.5 hours, it's one of the cheapest forms of entertainment).

ww520• 15 years ago

It is another way to segment the customers. Theaters would love to charge the total price (ticket+concession) on everyone, but not everyone is willing to pay such a high price to watch a movie, so theaters segment the customers into two piles - one willing to pay the basic price (ticket) and one willing to pay the premium price (ticket+concession).

wr1472• 15 years ago

There was a Channel 4 programme (in the UK) recently where super chef Heston Blumenthal goes to various food based businesses and tries to re-invigorate/turn around fortunes.

In this particular episode (http://www.channel4.com/programmes/hestons-mission-impossibl...) he goes to a large multiplex to see how he can create alternatives to popcorn. He produces some amazing concepts but the bottom line is popcorn is too profitable to strike off the menu; less than a penny to produce a bag of popcorn that retails for £3-£4. Even the paper bag the popcorn comes in cost more to buy than it does to make the popcorn.

PS: Link may only work in the UK.

padobson• 15 years ago

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.

I absolutely love this answer. I think it explains to a T the best way to extract value from a social network - and Zynga is proving it more than anyone.

The cost to join a social network is some amount of personally identifiable information. The value you get out of joining is that you will be able to contact, keeps tabs on, and enjoy various types of media with people you're interested in (friends on Facebook, celebs/friends/thought leaders on Twitter).

However, the cost to joining the social network is lower than the cost that some people (higher type customers) are willing to pay, so social networks and their app makers seek to extract the surplus by charging for various types of digital content (ironically, sometimes movies - http://news.yahoo.com/blogs/technology-blog/now-playing-face... ).

Zynga takes this to an even greater level by offering you a chance to play with your friends for free, and then charging higher type customers for additional content.

In both of these cases, the value provided to the customer is directly correlated to the number of people using the service (you know, Network Effects, http://en.wikipedia.org/wiki/Network_effects ), but to those higher type social butterflies that need to show off their good taste by buying kitten icons or can't watch a movie online without their friends watching with them or need to be able to school their friends at Mafia Wars, they are willing to pay more than others and will pay a great deal more than their friends for a similar experience.

One last thought: the "activities with celebrities" marketplace is incredibly fertile. Night clubs pay celebs big money if they party on the premises. Celebrity golf events bring in big cash for charities. It seems like Twitter is perfectly positioned to cash in on this phenomenon, and I have no doubt that their are some higher-type Twitterers that would pay big money in a scarcity situation to play Mafia Wars with Shaq.

imgabe• 15 years ago

How many people would decide which theater to go to based on popcorn price? I look at if it has the movie I want to see at the time I want to see it, if it's convenient to get to, and how nice the theater is. Driving out of my way or going to a crappy theater to save one or two dollars on popcorn is not worth it.

pessimizer• 15 years ago

1. It's not a competitive market; each person who wants to watch a particular movie only has between one and maybe four choices of venue until the travel costs outstrip any differences in price. Any number of these could be owned by the same chain.

2. In addition, there's no way to compare concession prices easily before making that choice; once the potential buyer of popcorn, even assuming they're looking at the popcorn prices before buying a ticket, has seen those prices, they need to add the relative travel time to speculative estimates of other theaters' popcorn prices.

3. Lastly, they collude, and all the prices are about the same. Good luck getting somebody to let you run their movie in your theater-killer that leads on concession prices. Vertical integration was a term invented about the movie theater industry; contracts are in place.

alttag• 15 years ago

Re #3: Game theory suggests theaters can approach the same higher prices without colluding. Seeing as how price collusion is illegal (in the U.S.), and the results are reachable in another way, the accusation isn't necessary.

Cushman• 15 years ago

I'm curious what the effective difference to society is between a group of businesses all agreeing not to compete on price, and a group of businesses which each individually decides not to compete on price.

freshhawk4• 15 years ago

Maybe not necessary, but likely accurate. You can say that price collusion is illegal but until those laws are enforced that's not much of an argument one way or another.

Confusion• 15 years ago

Game theory assumes all agents are rational. They aren't. Pricing popcorn 20% below a competitor may seem like a good idea to a business owner and may indeed sway a consumer to return (people say things like "the ticket is more expensive, but I think the cheaper popcorn is worth it", even though numerically, it isn't)

If there is only some token competition on popcorn prices and there is research showing that that usually doesn't happen in real markets, then that is a pretty strong suggestion they are colluding.

gwillen• 15 years ago

I think all the options there ignore the _very_ _very_ obvious fact that popcorn is _not_ a competitive market, because most of the consumers in the market don't know the prices! If you disagree, try to recite for me how much popcorn costs at your nearest three major theaters right now. Do you check before you decide where to go for a movie?

This is well in line with my own pet theory of the free market, which says that people's brains can handle optimizing on one or _maybe_ two things when making a product decision, and anything else is overwhelming. For a theater, that's what movie you want to see, and what price you have to pay. Anything beyond that and you have to start making spreadsheets, and it's not worth it to anybody. So beyond the price and the main desirable quality of the product, producers aren't really forced to compete, because nobody will call them on it.

albickers2• 15 years ago

It sounds like you'd enjoy looking into "the paradox of choice" (the econ literature, not the junk science book with that title). There is a good bit of evidence that too many choices reduces utility and induces irrational behavior

powertower• 15 years ago

> Owners joke about being in the candy business. If you didn’t have concessions at a movie theater, there would be no movie theater. We have movies just to get people in to buy popcorn and candy, where we make our money.

http://www.google.com/search?q=movie+theaters+make+money

Someone really dropped the ball giving out those answers. That thread is pure intellectual masturbation.

It's widley known that ticket prices barley cover the expenses and fees associated with getting and showing those movies...

In general, movie theaters don't make money on movies. They make money when someone comes in and buys the very expensive popcorn, drinks, and candy. Which then maybe nets you a profit that keeps the doors open.

Also, gas stations are about the same... They don't make money on gas. They make 70-90% of their profit when someone comes in and buys the cigarettes, lotto tickets, and products.

michaelochurch• 15 years ago

Price discrimination. Expensive food is a mechanism for bringing people closer to their maximum willingness-to-pay by charging for a convenience: available food that you can't be thrown out of the theater for eating. The high pricing tier is patrons who buy the expensive food-- people for whom the price difference between a $15-per-person movie experience and $10-per-person is small. The low pricing tier is those who either eat before going to the movie or who bring in their own food (taking a risk, albeit a small one, of being caught and kicked out, which tends to ruin the experience).

Popcorn is especially easy to sell because of its low-volume-to-nourishment ratio. You can buy candy at a corner store and sneak it in pretty easily, but popcorn? It's less annoying just to pay the high price than to bring a large bag of popcorn in. Same goes for those disgustingly large sodas.

freshhawk4• 15 years ago

> 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).

Doesn't this answer the question right here?

People don't do that. Everything we know about cognition and human decision making (from neuro scientists, not from economic philosophers) tells us that humans are not rational actors making decisions using game theory.

All the answers certainly show the descriptive power of economic philosophy, but since the same group could be just as convincing about "why movie theatre popcorn is so cheap" I'm not sure what the point is of debating these things in a framework without any predictive power.

Symmetry• 15 years ago

Except that if "rational actor" didn't describe humans at all people couldn't even manage to get to work in the morning. There are a large number of ways in which people aren't rational actors - we are loss averse, we overuse the availability heuristic, we're subject to anchoring effects, etc. However, if you look at the space of all possible ways someone could behave, we're not too far from being perfectly rational. If I'm in a store and I'm thirsty I'll buy a drink rather than some salt or a mop. If I want to get to my friend's house I probably won't try to get there by swimming except in really unusual circumstances.

freshhawk4• 15 years ago

Right, but predictions or descriptions of human behaviour based on guesses as to where humans fall on the line between perfectly rational and completely irrational are also guesses.

And when discussing movie theatre popcorn I think it's pretty clear that the irrational or arbitrary aspect of human rationality is in play here. The discussion on stackexchange is silly, you mentioned anchoring effects yourself.

ruggeri• 15 years ago

I think a lot of the discussion (including the accepted answer) is missing the point: how, _in the presence of competition_, is the theater able to profitably price discriminate. The competitive assumption is supposed to imply that price should be driven to cost. Without competition, any business will price discriminate if they can.

As others have pointed out, probably price of popcorn is not a big factor when choosing theaters. People don't have it in mind, or don't expect to buy popcorn (but then are suckered by the butter smell). It may come down to whether people are responsive to popcorn price; showing times and proximity are probably bigger factors.

Even if people were responsive to popcorn price deltas of ~$2, perhaps theater owners know that none of them has a unique ability to compete on popcorn price. Theater X can cut their prices, but theater Y can always respond and match it. As long as the cut is being matched, the theater does not "steal" any customers, and is only shedding revenue.

Two theaters can compete all the way down to marginal cost; what, $1 for a bag of popcorn? Let's say theater X has even better popcorn technology: it can produce popcorn for $.90, $.10 cheaper than anyone else. Still, theater X is not incentivized to sell their popcorn cheaper, since it is doubtful theater-goers will choose a venue based on $.10 off popcorn.

So with a little foresight, perhaps theaters realize none of them would profit by competition on popcorn prices. That's the other answer being kicked around: collusion.

lpolovets• 15 years ago

I think this is like flight pricing. People don't typically think about luggage fees, meal cost, wifi charges, etc. They only look at the flight price and whether the flight time is convenient for them. This means airlines/theaters are free to charge a premium once you've purchased the main ticket.

Also, the numbers involved here are pretty low. I don't know many people who would drive across town for a theater with cheaper popcorn, even if such a theater existed.

kennethologist• 15 years ago

This is why I love HN. A question as "simple" as this has sparked so much discussion and as a result I have learned so much about the movie showing/theater industry and how the business works.

Thanks mates!

In a competitive market, why is movie theater popcorn expensive?

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