You are waiting your turn at the concession stand, staring at the menu. A small popcorn is $7.50 but for “only” $2 more, you can get a bucket of popcorn the size of a trash can. You know it’s a ripoff but yet you still find yourself reaching for your pocket. You may wonder to yourself sometimes, is the theatre owner just greedy? Well the truth is, maybe a little. But from an economic perspective, that overpriced buttery snack is an example of Price Discrimination and Cross - Subsidisation. Believe it or not, without the $10 popcorn the entire movie going experience as we know it would collapse and would cease to exist.
To understand the astronomical prices of popcorn we first we need to dive into the pricing of the movie ticket. Most people have the assumption that when they pay $15 for a ticket, the only goes straight to the local theatre but in reality, during the opening weeks of a blockbuster, dominant movie studios like Disney or Warner Bros often take up to 70 to percent of ticket revenue. After paying for electricity, staff and rent, the theatre is often losing money on screening the actual movie itself. This leads to the creation of a unique business model : movie theatres are not in the “movie business” they are in the concession business using the movies as a decoy. The movie is simply the “loss header” used to attract customers to buy the concession they have on display.
So you might be thinking, why not just charge $25 for a ticket and $2 for popcorn? This is where the concept of Price Discrimination comes into play. If a theatre raised ticket prices to $25, many people including low income groups, students or even families would not go to the movies at all. By keeping the price of the ticket relatively low the theatre ensures that they constantly have a high volume of customers walking through the door. Once the customer is inside, the theatre then separates the customers into 2 distinct categories : price sensitive customers and high value customers. The price sensitive customer is interested in watching the movie but is on budget. They skip the popcorn and just go to the theatre to enjoy the film. On the other hand, the High Value Customer view the movie as a full experience which is including the concessions as well and hence is willing to pay the premium for snacks. By charging a high price for concessions instead of the ticket themselves, the theatre is able to successfully extract more money from people who are willing to spend it while still allowing the budget conscious crews to attend.
The main reason why the “large bucket” exists for just $1 more than the “Medium” is a classic economic trick which goes by the name of the Decoy Effect. This Medium size bucket of popcorn is not really there to be sold. Its sole purpose is to make the Large look like a bargain. When you see that a massive increase in volume only costs a relatively tiny increase in price, your brain convinces you that its a “good deal”, even though you are spending more money than you originally intended thus giving the theatres nearly a 900% profit margin. This is the main reason why theatres ban outside food. It’s not to keep the theatres clean, it’s to protect this delicate ecosystem. If everyone brought their own snacks then theatres would have to quadruple their ticket prices just to stay in the business.
Next time you are in a theatre and you feel a sting in your wallet for that bucket of popcorn, just remember this, you are not just paying for a snack, you are paying for the seat, the air conditioning and the right to see the latest blockbuster on a big screen with loud speakers. It might be the most expensive popcorn you will even eat but it’s the engine that is singlehandedly keeping Hollywood alive.
