I remember having to look twice at the price card in a cinema recently. The price of the popcorn was much more than I was willing to pay. A friend told me that the cinema owner has a complete monopoly once a customer enters the cinema and hence could price the popcorn as he wished. While I didn’t say no at the time I was not convinced by her explanation.
If the owner does indeed have a complete monopoly then why does he not charge a fee to use a washroom? Or why is the air conditioning free of cost? After all a monopolist can do as he likes, right? The answer here is that these charges would make the cinema less attractive for customers. Even if he were to charge a rest room fee he would be forced to sell cheaper tickets in order to attract customers. So what he would gain from the rest room fee would be lost at the box office along with inconvenience for the customers.
Like most consumers, I am indifferent to paying 50Rs for popcorn and 350Rs for the movie or 100Rs for the popcorn and 300Rs for the movie. In other words, if popcorn is cheaper then I will eat more. It is important to look at the taste and preferences of movie goers to understand popcorn pricing. Cheaper popcorn will attract popcorn lovers (like myself!) and make them willing to pay a higher price at the box office. But to make the most of this willingness he must raise ticket prices and if there are enough people who do not eat popcorn then this strategy will backfire.
I must address this ‘willingness to pay’ that I’ve been referring to. When you walk into a store to buy a laptop the salesperson is likely to ask you something along the lines of ‘How much do you wish to pay?’ Of course what he really means to ask you is what is the most you are willing to pay? Economists call this the reservation price. (I wish it could be zero) Ideally, the seller would like to charge you exactly this price but he questions you about your job, profile or utility of the product to charge you as much as he can.
Research from the Stanford business school suggests that expensive popcorn benefits the consumer. The findings of the research suggest that by charging a higher price on popcorn and other goods ticket prices can be kept lower. In fact, cinemas rely on the sales of popcorn and other goods for profit. These goods account for 20% of gross revenue but 40% of profits.
A general analysis of popcorn consumption patterns suggests that people who book their tickets online or people who show up in groups typically consume more popcorn. More research is needed to figure out why. But this raises an important issue: What purpose does the high pricing of popcorn solve? Popcorn is not expensive to charge more money from consumers. That purpose would be better served by cheap popcorn and expensive tickets. The real purpose is to extract different sums of money from different customers (economists call it price discrimination). Popcorn lovers, will pay more for consuming popcorn. The objective of the owner is not to set a uniform price for all customers but to match a price to a customer’s willingness to pay.
Broadly speaking, expensive popcorn seems to be in the best interests of consumers. This helps in keeping ticket prices relatively cheap and keeps the business viable at the same time. Maybe the price of popcorn is a fee for cleaning up after the moviegoers leave or maybe not. I will let the reader decide.