Warning – there are graphs, numbers, and mentions of demand curves ahead.
I read an article this week about a class-action lawsuit against movie theaters for charging outrageous prices for popcorn. Go here if you want to read the specifics. Let’s start this off frankly – the lawsuit is a waste of the courts’ time and the person bringing this lawsuit is an idiot.
The complaint in the lawsuit is that a fountain drink and a box of Goobers cost him $8, while the same items cost less than $3 at nearby stores (which aren’t providing entertainment). One interviewed person said that she spent $5 for a movie ticket and $11 for a popcorn and fountain drink.
Let’s talk about demand curves. The way people decide what to spend money on should be based off rational thinking, and when deciding to see a movie, they should consider the cost of the whole trip when they go. So if you pay $5 for the movie ticket and $11 for popcorn and a fountain drink, your total cost was $16. You shouldn’t care if those prices were different – like if the movie ticket cost $12 and the concessions cost $4. If two theaters each have one of those two sets of prices, and you plan on getting just the ticket, drink, and popcorn, the prices would not affect your choice.
I’ll make this simple and say that a movie theater has decided to keep the price of one adult ticket plus one medium popcorn at $10. Now they have to decide what charge for a movie ticket and what to charge for popcorn. Here is a graph showing the demand curve for popcorn:
You can see that as the price of popcorn goes up, the percentage of people who paid for a ticket that will buy the popcorn goes down. I started at 100% if the popcorn is free and 25% at an outrageous price, because people out on a date don’t want to look cheap by taking someone out to a movie, but not getting them popcorn. By doing some arithmetic based on the microeconomics data, the theater manager can find the best price for popcorn and movie tickets (that total $10) to maximize revenue:
As you can see, the total revenue is a bell-shaped curve with a peak when tickets cost $7 and popcorn costs $3. This used an estimate where the movie theater gets 40% of the ticket sales as revenue. By changing that estimate to 20%, this is the result:
And look, now the optimum price of tickets is $5 with popcorn also $5. When movie studios squeeze the movie theaters for more share in the ticket sales revenue, it gets passed on to you in the form of higher popcorn prices.
And that’s why the guy with the lawsuit is an idiot.
On a personal note, back in college there was a movie theater that had a Wednesday night popcorn special, where you could bring your own container and they would fill it for $1. I had a plastic cauldron from a Halloween decoration which probably held 8 gallons of popcorn, which means that it barely cost the theater more than $1 in popcorn kernels and butter, but I showed up at least once per month to buy a ticket and a drink and took my huge thing of popcorn home, usually to get a few more handfuls eaten over the next day before getting thrown away (left in a pile outside for squirrels).