Why Are Movie Theaters So Expensive?
In the 1930's, the movie and popcorn combination took off as one of the most dynamic duos ever seen. During the Great Depression, there was a strong quest to find cheap, affordable entertainment paired with the perfect snack. Initially, private vendors would sell popcorn outside movie theaters but slowly, popcorn made its way indoors until the theatre owners began to sell it themselves. Fast forward by a few decades to today where a typical bucket of salted popcorn costs $7.99 - the same popcorn that is sold for an average price of $1.69 at local stores. This is a mark-up of almost 500%!
One would assume that movie theaters receive a majority of their revenue from ticket sales. However, around 60-70% of ticket revenue goes back directly to the movie distributors, leaving the theatre with an income of around $2 per ticket. In fact, in 2018, Cinemark Theaters collected $1.8 billion in ticket revenue but had to pay back over $1 billion in fees to movie distributors alone. To this, one has to add the regular costs of rental (which tends to be exorbitant in prime locations), staff and maintenance to provide the best experience to all consumers. This is why theaters capitalize on popcorn, along with other snacks, as the perfect complement to the movies.
A few factors have been noted to increase the sales of popcorn and other snacks. Interestingly, a study of Spanish theaters highlighted that those who bought their tickets online were more likely to buy snacks at movie halls, compared to those who bought their ticket in person. This suggests that the physical transaction of spending money on a ticket may cause people to rethink their spending on other things, as opposed to when the consumer has a more detached memory of the original purchase of the tickets through online transactions. Furthermore, it is noted that people who come to cinemas in groups are more likely to buy popcorn and other food items. This could be attributed to group pressures that invite increased spending habits as a form of “fitting in.” Additionally, group outings tend to signify a celebration in which people spend more to enjoy the occasion.
Popcorn is not the only method cinemas use to maximize their profits. They also employ a form of third degree price discrimination. This is where prices are set based on the different price elasticities of demand (PED) that different groups of consumers have for the good. PED can be defined as the responsiveness of quantity demanded to a change in price. For cinemas, it is pretty easy to separate the market into various segments. Senior citizens and students have a higher price elasticity of demand as they do not have a strong income to support their purchases. Therefore, cinemas offer these groups discounts and promotions to increase the demand within this segment. On the other hand, working adults, backed with a higher income, have a lower PED for movie tickets and therefore can be charged higher prices. Therefore, cinemas use this form of price discrimination to maximize revenue earned from each group.
However, we cannot close our discussion without considering the role of the Coronavirus pandemic on this industry. With many movie theaters being shut or allowing limited entry, ticket revenue has been severely impacted. The California Department of Public Health has given theaters a list of guidelines under which they can operate, including how “movie theaters must reduce capacity to just 25 per cent or a maximum of 100 theatergoers, depending on which is lower.” With fewer people coming to the movies, as well as the increased costs of cleaning and sanitizing seats between shows, it seems as though popcorn and price discrimination may not be enough to stop the pandemic from poaching cinema’s profits.
Not only are movie theaters battling the wrath of Covid-19 during this period, but now, more than ever, they are facing the competition of online streaming platforms. As streaming services such as Netflix, Hulu and Amazon Prime gain popularity, consumers may find that watching a movie in the comfort of their own homes is the smarter option, as opposed to sitting in an uncomfortable seat distracted by the whispers of nearby movie-watchers, causing movies to lapse into a sunset industry. Added features such as Netflix Party have brought in a social aspect to home streaming, which could previously only be experienced in a movie hall. Nevertheless, movie theaters still have the advantage of receiving the rights to stream a movie first, but this could change in the near future. Perhaps the tactics cinemas have used for so long to maintain their revenue may no longer be enough for them to remain profitable. Popcorn and price discrimination have definitely played an important role for movie theaters so far, but what next?
Written By Aditi Rudra, Undergraduate Economics Student
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