Popcorn Economics: the analysis of a ripoff

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I don’t buy popcorn at the movies.

Don’t get me wrong – I love that buttery junk, but the thrill just isn’t worth five bucks. Apparently, the iconic movie snack has reached a spot on BillShrink’s “12 biggest ripoffs in America” list.  Amusing.  But it begs the question: are things like movie popcorn and hotel mini-bar snacks really ripoffs?

You hear it all the time: “I can’t believe you guys are charging that much for something I can buy down the road for half that!”  This usually precedes “I’ll take two of them.”  The unsettling truth is this: as long as there’s a line, the price is just right. In fact, if the line is too long maybe it’s time for a price hike!

The question here is one of value.  What sets the value of any given product?  If you say “the guy selling it” you’re wrong, but only half wrong.  Doing business requires trade.  Have you ever tried to trade with yourself?  It really gets you nowhere. Like dating, it takes two.  The moment someone decides they want something – voila! – a market is born.  The next step is for someone to realize the market is there and try to provide for those wants and needs.  So we have a demander and a supplier… all that is left is negotiation. Value is the product of negotiation.

Personally, I haven’t taken much advantage of negotiation when shopping, as Dave Ramsey insists I can.  It doesn’t mean some negotiation hasn’t taken place.  Thousands, or millions of people have come before me to buy that shiny new iPod I have my eye on.  Before it was released the company had the price-point tested to see what people would be willing to pay… for a shiny new iPod with this feature or that feature.  So until people stop buying the iPod, Apple will be able to say that they’ve set the price perfectly – and they’d be right.

When sales do slow and the price drops it may begin approaching the cost that Apple has paid to create the product in the first place, and ship it to your local Apple Store, and pay the sales people to explain to customers where the “start” menu is.  When that happens Apple has three choices: lower the quality, drop the product, or add some new features and hike the price back up. Their decision will be based on what consumers want.

Now, we’ve concluded that value is the product of negotiation, and that companies have to find what people want and give it to them. Let’s apply that to the $5 popcorn. Let’s say you and I are going to the Alice and Wonderland premier this Thursday with the free tickets our friend Clay gave us. I walk in and head to the auditorium while you make a bee-line for the concession area. We both know the popcorn is expensive, but while I’m fine doing without, you are of the opinion that a movie simply isn’t complete without a bucket of buttery popcorn and an obscenely large soda. Where exactly is the ripoff?  Other than the few times I stole a handful during the movie, you got exactly what you paid for. You traded the extra $5 for a better movie-going experience.  In the process the theater made a little money so they can continue to provide movies, popcorn and soda, and we both had a great time.

Ok, so maybe it’s not a ripoff as long as customers are willing to pay up, but earlier I mentioned that if the line is long, perhaps the price should be hiked.  That seems unnecessary, if not immoral. Sellers should just figure out what it costs them and add a little more for profit, right?  Wrong. High prices have a function, and it’s not just to make you angry.

First, it is a method of distribution. The number of people who end up with the product are the same, but it will be those who want it most or can afford it most. The alternative is simply the first-come-first-served method. I doubt that such a system holds any higher moral justification than the first. Secondly, and perhaps more importantly, high prices signal to competitors that there is a booming market, and with competition comes all the wonderful things competition brings. In the end you’ve got more of the product (so more people are able to get it) with more variety and a more affordable price.

All of this aside, it’s still no fun paying extra for movie theater snacks.  But we can’t blame them.  The most important votes we cast are made with our wallets.


Update: An Isreali lawmaker is pushing to outlaw high prices on popcorn at the theater. Yes, it’s a downright crime to charge people too much for candy and sodas. Oh wait,… what was it about that soda tax?

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