Introduction
If you have ever gone to a movie theatre, you might have noticed that the popcorn that is being sold there is often more expensive than the ticket for the movie itself. It must have confused you. This strategy has often intrigued economists and consumers. At first glance, it seems that theatres are simply overcharging because they can. But on a closer look, we find that it is an economic strategy which is designed to maximise profit. This essay explains why theatres sell cheap tickets but expensive popcorn.
Economics of Movie Theatres
Many people think that theatre is a single business, but it is actually two different sources of revenue: ticket sales and concession sales. Theatres earn relatively little in the movie ticket-selling business because a large percentage of the money generated is allocated to the film producers or production studios. In many cases, theatres might retain only 20–30% of ticket sales early on, with the percentage increasing slightly later in the film’s run.
In contrast, concession items like popcorn or soda have very high margins of profit- often exceeding 80%. So, even if a very small number of moviegoers buy snacks, theatres will be able to make a lot of profit. Cheap tickets will attract the people, and the expensive concession items will lure those people who are willing to spend extra money so that they have the full theatre experience.
Price Discrimination
The heart of the strategy lies in the concept called ‘price discrimination’- charging different consumers different effective prices for the same experience, depending on their willingness to pay. However, directly asking the customer how much they are willing to pay would be impractical. Instead, they use indirect price discrimination. The base ticket price is kept low to attract many customers. But the concession prices are kept high so the customers are forced to pay high prices if they want to eat something, as outside food is not allowed inside the movie halls. Also, people who come with their families, or people who are dedicated movie fans, are willing to pay more just to experience the full theatre experience.
This is a very logical mechanism as it self-selects its customers. Those people who are sensitive about the prices can enjoy the movie without buying any snacks, but people who do not care about the prices voluntarily pay for the experience.
Complementarity and Captive Markets
Popcorn and soda are complementary goods to the movie experience. Many people think of popcorn when they are thinking about movie halls. It is almost a tradition now. This complementarity gives theatres the leverage to raise their prices.
As mentioned earlier, outside food is not allowed inside movie theatres. This is a very efficient step towards building high profits for the theatres. Consumers have no choice except for the theatre food if they are hungry, which is very expensive. It can be seen as exploitation, but it is legally permissible to do this. So, by controlling the product access inside the movie hall, theatres create a high margin profit for themselves.
Alternative Strategies and Why They Fail
Can theatres simply increase the ticket prices and reduce the food prices? Yes, legally it is possible. But why would they do that? If ticket prices are high, people will wait for the movie to come to any OTT platform and not go to the movie halls. This would reduce their ticket sales, especially among price-sensitive people. By keeping the ticket prices low, theatres maximise their profits as explained above.
In addition, theatres often compete with home entertainment- OTTs, large TVs, and home sound systems. To win this competition, they must make the entry price, i.e. the ticket price, low. They also must make the theatre experience look very exclusive to the audience. Once the customers have bought the tickets, all the competition disappears, and the concession prices become a sustainable way to increase the profit.
Behavioural Economics
Behavioural Economics helps explain why people tolerate high concession prices. People treat the ticket purchase and the snack purchase as two separate categories. Paying less for tickets feels justified as ‘entertainment,’ while paying more for popcorn feels justified as ‘a treat.’ The gap between the payments makes the customer think less of the total costs of both of them combined.
Conclusion
By using price discrimination, these theatres attract many customers while still getting more profit from those who are willing to pay more. What appears as an unfair practice is actually a very efficient way to keep the theatre business flowing well. Ultimately, the strategy of low ticket prices and high concession costs exemplifies how economic principles shape everyday experiences, balancing accessibility with profitability.
Image Source
https://www.axios.com/2023/03/17/movie-theater-recliners-luxury-seats-box-office
Photo: Fabian Sommer/picture alliance via Getty Images