A few weekends ago, while I was writing an exam for my students, I got to thinking about popcorn and movies. Part of this thinking was inspired by this piece by Edward Jay Epstein that the entire movie theatre business was driven by popcorn and soft drink sales. That is, theatres competed not to be able to make money from movie tickets but from other sales. This appeared to make some sense given the high margins on those products and their persistence in the face of competition. [Something that was the subject of one of my earliest posts on this blog].
The theory goes like this. Consumers don’t think about buying popcorn or not until they are at the movie theatre. That means two immediate things: (i) movie ticket prices will be all they look at when deciding where to go and (ii) that they can be subject to monopoly pricing for popcorn when they finally get there. But it also means that movie ticket prices will be discounted somewhat because the theatres expect to earn some money from other stuff.
But then, this has another implication. Movie theatres will earn much more from add-on sales (like popcorn, etc.) if they are much more tempting when people get to the theatre. So the theatres that provide great food options will earn more money from that and will have a bigger incentive to get people through the door. In competition with other theatres that means that their ticket price will be slightly lower. But do we see this? Do we see movie theatre with the lowest ticket prices having the best confectionary options? My causal observation suggests that this isn’t happening. But if that is the case, how can Epstein be right in saying add-on sales drive the movie theatre business?