Today I planned to take my family for a movie (Despicable Me 2). While buying the movie tickets, my kid asked for Popcorn pack. It was normal as we always have a popcorn bucket while we watch the movie and not only us, all movie goers do the same. But this time it was different. The Popcorn bucket cost made me think why popcorn is so costly at movie theater though it costs so less outside. I could not digest the fact that it could be due to the venue. To find the real reason why popcorn is so costly (to find reason other than the venue), I reached out to encyclopedia of information (google.com). Following is what I found which was something new for me. May be lot of people know about this but I thought of sharing this with those who still wonder why is it so.
The answer lies in this question-
When do firms have an opportunity to charge different prices to different consumers?
That $8 bucket of popcorn you get in the movie theater costs probably less than $1 to produce. What explains the 800 percent markup? Economists have struggled with question for years, but it was answered in research paper in 1983.
Moviegoers vary in their willingness to pay for seeing a movie, and a movie theater has an incentive to identify the high demanders and charge them more, while keeping the price low for low demanders. It turns out that a reliable predictor of the willingness to pay for a movie is the consumption of popcorn. The people who buy a lot of popcorn are the consumers who are willing to pay the most for a movie experience. So a convenient way for the theater to charge more to the consumers who are willing to pay more is to jack the price of popcorn. As a result, the low demanders simply pay the movie ticket price, while the high demanders pay the movie ticket price plus the jacked-up price of a bucket of popcorn.
This explanation seems so abstract and more ideal on research paper but not for real time application.
This can be understood with this example- Suppose a low demander is willing to pay $21 for a movie, while high demander is willing to pay $30 for a movie and a popcorn. If the theater charges $20 for ticket price and $8 for popcorn, each buyer respectively gets a consumer surplus of $1 (equal to $21-$20 for low demander) and surplus of $2 (equal to $30 – $28 for high demander), so both consumer will see the movie. If instead the theater charged $25 for movie ticket and $1 for the popcorn, the high demander will see the movie, but the low demander won’t. The theater’s pricing strategy gets the low demander into the theater at a ticket price of $20, and because the marginal cost of the additional consumer is close to zero, the theater’s profit increases.
References:
Source- Based on Ricard Gil and Wesley Hartman, “Why Does popcorn cost so much at the Movies? An empirical analysis of Metering Price Discrimination” (Research Paper 1983, Standford Graduate School of Business, 2008).