Concessions on Movie Ticket Pricing?

When you go to the movies, be sure to say thank you to all the people standing in line waiting to buy popcorn, soft drinks, and candy:

Why does popcorn cost so much at the movies?, by Jennifer McNulty, UCSC News: Movie theaters are notorious for charging consumers top dollar for concession items such as popcorn, soda, and candy. ... New research from Stanford and the University of California, Santa Cruz, suggests that there is a method to theaters' madness--and one that in fact benefits the viewing public. ...

The findings empirically answer the age-old question of whether it’s better to charge more for a primary product (in this case, the movie ticket) or a secondary product (the popcorn). Putting the premium on the "frill" items, it turns out, indeed opens up the possibility for price-sensitive people to see films. That means more customers coming to theaters in general, and a nice profit from those who are willing to fork it over for the Gummy Bears.

Indeed, movie exhibition houses rely on concession sales to keep their businesses viable. Although concessions account for only about 20 percent of gross revenues, they represent some 40 percent of theaters' profits. ...

Looking at detailed revenue data for a chain of movie theaters in Spain, Wesley Hartmann ... and Ricard Gil ... compared concession purchases in weeks with low and high movie attendance.

The fact that concession sales were proportionately higher during low-attendance periods suggested the presence of "die-hard" moviegoers willing to see any kind of film, good or bad--and willing to purchase high-priced popcorn to boot. "The logic is that if they’re willing to pay, say, $10 for a bad movie, they would be willing to pay even more for a good movie," said Hartmann. "This is underscored by the fact that they do pay more, even for a bad movie, as is seen in their concession buying. So for the times they’re in the theater seeing good or popular movies, they’re actually getting more quality than they would have needed to show up. That means that, essentially, you could have charged them a higher price for the ticket."

Should theaters flirt with raising their ticket prices then? No, says Hartmann. The die-hard group does not represent the average movie viewer. While the film-o-philes might be willing to pay, say, $15 for a movie ticket, a theater that tried such a pricing tactic would soon find itself closing its doors.

"The fact that the people who show up only for good or popular movies consume a lot less popcorn means that the total they pay is substantially less than that of people who will come to see anything. If you want to bring more consumers into the market, you need to keep ticket prices lower to attract them." Theaters wisely make up the margin, he says, by transferring it to the person willing to buy the $5 popcorn bucket.

The work of Hartmann and Gil substantiates what movie exhibitors have intuited all along. "The argument that pricing secondary goods higher than primary goods can benefit consumers has been circulating for decades, but until now, no one has looked at hard data to see whether it’s true or not," says Hartmann. ...

Comments

[Bruce Wilder]

". . . one that in fact benefits the viewing public."

"The argument that pricing secondary goods higher than primary goods can benefit consumers . . ."

Call me a cynic, but I don't see that they have much basis for the claim that consumers "benefit" from this scheme.

I suppose I should go easy on what is probably just a badly written press release, but come on!

The question of consumer benefit ought to come up against the public policy question: should consumers be allowed to bring their own popcorn?

And, the argument that popcorn-buyers are die-hard movie goers, who are undiscriminating, seems to suggest that they are bad for consumers, because they subsidize a lot of bad movies. People, who would like to go to a good movie, cannot, because popcorn-eaters are in there chomping away, making it profitable to show a bad movie this week.

"Should theaters flirt with raising their ticket prices then?"

The more relevant question would be, should theaters flirt with varying their prices? That is, should they charge more for a good movie and less for a bad movie?

Most movie theatres, most of the time, are showing movies to a lot of empty seats -- marginal cost is very low relative to average cost, making some kind of price fixing and price discrimination necessary for theatres to survive. And, the theatres and the studios would seem to have both a problem coordinating the marketing and promotion, and a conflict of interest.

[Charles Young]

The (false) assumption seems to be that the pleasure of seeing a film is not affected by the presence of a noisy popcorn-muncher in the adjoining seat.

[save_the_rustbelt]

Ah, most of us figured this out by the time we were 17, well before our first econ class.

It could be that my addiction to Sno Caps is subsidizing bad movies - I plead guilty.

Could the folks at Stanford have a little bit too much time on their hands?

[bp]

the proposition is that economic welfare is maximized due to an optimal pricing mix of goods and services (movie tickets and popcorn) which generates just enough revenue to recover the total cost of remaining in business (no economic profit, i.e. movie theaters are competitive)

any other combination of prices would reduce revenue and economic welfare, i.e., raising movie ticket prices or lowering popcorn prices would put theaters out of business

the same argument could be made for any retail outlet which sells more than one "primary" good or service, which is practically all of them, so the combination of such studies of complement verus substitute prices among their products are near infinite

more interesting applications of the argument occur when applied to goods and services with more inelastic demand, less competitive provision and exhibit characteristics of public goods like cable tv

in this case, the "primary" good is not competitive in the first place, which is exploited to tie in a wide variety of "secondary" goods via forced bundling, i.e., "if you want the movie, you have to buy the popcorn too"

cable tv is a prime example of decreased economic welfare associated with overpriced secondary goods (or conversely interpreted, a truckload of "bad movies") which one is forced to purchase in order to get the "good movies"

unlike the movie theater, cable tv does not offer a la carte programming with no popcorn (beyond pay tv), even though it could and stay in business, and if it did, those "bad movies" would have very low prices on a stand-alone programming basis combined with lower prices for the "good movies" as well, compared to current prices for packages of forced bundles

the end result would be both, an increase in economic welfare as well as a huge redistribution of producer to consumer surplus by reducing "secondary" prices, not increasing them

[Bruce Wilder]

bp: "the proposition is that economic welfare is maximized due to an optimal pricing mix, which generates just enough revenue to recover the total cost of remaining in business (no economic profit, i.e. movie theaters are competitive)"

Except that argument assumes facts-not-evidence, as the lawyers would say.

Two points. First, the one I have already made: there's no short-run equilibrium price for movie tickets; this is not a market with a market-clearing price. Assigning the social welfare characteristics of a competitive, market-clearing equilibrium price to a price, which is not clearing a market -- well, you are up the creek without your theoretical paddle. At best, the price might represent one Nash equilibrium in a complex, multi-player strategic game; as far as I know, the social welfare implications of such a Nash equilibrium is anybody's guess.

Point 2: the theatre chains are also making a strategic choice about how many theatres to build, a strategic choice, which encompasses not only expectations about how other theatre chains will respond, but, also, what kind of deal can be cut with businesses or government (e.g. will a mall cut a deal to get a theatre to drive foot traffic?)

Social welfare depends, largely, on whether those siting and investment decisions are "optimal" in any reliable sense. Maybe, the theatres are led to overinvest, to build too many, too small theatres. Monopolistic competition generally lean in this direction, and I could make a plausible argument that the market structure for movie theatres would tend toward that outcome, and a glance at the industry would suggest something along those lines is, at least, superficially plausible.

Regarding bp's cable analysis, I would also make two points.

First, marginal cost less than average cost applies to cable, too. The only socially optimal price we are theoretically confident about is price = marginal cost = average cost, with marginal cost increasing -- the long-run competitive market equilibrium case. That's not going to happen in Cable TV service. The only pricing structure that is going to cover the sunk and fixed costs fully is going to involve some kind of price discrimination -- bundling channels together helps to accomplish that.

Point 2: the most important bundle in television, generally, is the bundle of advertising with content. The advertising is noxious at the margin (even if some inframarginal advertising might actually benefit viewers/consumers), but it makes valuable content free at the margin; the equilibrium (if there can be said to be an equilibrium) consumption of television is, arguably, excessive: people watch too much content, because its "free"; they watch more advertising than they want to see, and that's a marginal bad; and the content that they do watch, because it is chosen in the first instance by the adverisers, not the final consumers, reflects a pro-advertiser bias, and is sub-optimal in its quality relative to viewer desires.

[Bruce Wilder]

P.S. The desire by Cable Companies to bundle services is linked to the desire to minimize the marginal cost of watching a tv program, which is tied to the advertising/content bundle.

[cm]

Concession sales are less "price sensitive" as there is a "hostage" aspect to them -- you are already committed to be inside, and have to pony up by either social convention (date), pestering (kids), or simply to distract yourself from the non-action on the screen before the movie starts.

[dilbert dogbert]

Our experience at the last movies the wife and I went to were not good. Loud, too load sound and just an uncomfortable experience. It is the lack of control over your suroundings (loud neighbors and mess on the floor) and your inability to pause/stop/fastforward or return to a scene that drive us to not go to the movies. The poggy bait prices had nothing to do with our desire to go to a movie again. Netflix is our preferred method.

[Willliam Smith]

As someone who purposefully choses not to buy concessions (buying a diuretic during a 120 minute sitting-session makes no sense), I do appreciate that the ticket price is optimized for maximum audience size.