Tracing consequences both seen and unseen.
Justin M. StoddardPop the Corn Bubble Burst
Posted at 7:45 pm on March 31, 2010, by Justin M. Stoddard

When first I saw the headline “Israeli MP plans ‘popcorn law’ for movie munchers’,” I was sure the corresponding article would have something to do with either taxing or banning popcorn at movie theaters because of supposed health concerns.

It turns out, the reason given was much less nuanced and rather refreshingly honest:

Carmel Shama, from the governing Likud party, plans to bring the “popcorn law” for a vote when parliament returns from its Passover break next week, the mass-selling Yediot Aharonot newspaper reported Wednesday.

“We have to put an end to this. The public should not have to mortgage their houses for a soft drink and a snack,” Shama told the paper.

A large box of popcorn usually sells for about five dollars (four euros) at theatre concession stands, more than double what it costs at a supermarket and 10 times more than it would cost to make at home.

When I say “refreshingly honest,” I mean that there are no hidden overtones here. Carmel Shama doesn’t appear to be overly concerned with health. This doesn’t appear to be a redistribution scheme, where the proceeds from taxed popcorn would go into some government coffer. This is pure, straight-up theft.

This does raise an interesting question, however. Why is popcorn so expensive at the movie theater?

Economist Steven Landsburg isn’t so sure that it is. In chapter 16 (aptly named, “Why Popcorn Costs More at Movies”) of his book, The Armchair Economist, Steven Landsburg goes through a number of explanations for why the price of popcorn is as expensive as it is. The reasons may surprise you.

Intuitively, we would guess that the price of popcorn is high because once we enter the theater, we are a captive audience. They have, in effect, a monopoly on popcorn, since most theaters won’t allow outside food onto their premises. But, as Mr. Landsburg points out, at that point, the theater has a monopoly on pretty much everything within the sphere of its influence. There are no other restrooms, for example, other than those provided. There are no other drinking fountains or front row seats, etc… And yet, all of these conveniences come gratis with the ticket price. The reason for this is easy enough. Any ancillary charges once inside the theater would make said theater less attractive to customers. In order not to lose those customers, the theater would have to charge less for the ticket price. In essence, it’s a wash.

And so it may be for popcorn, as well. We pay higher prices for popcorn in order to pay lower prices for our tickets. But, in order to make prices attractive to all (popcorn munchers and popcorn abstainers alike), a happy medium must be found. This may be a matter of one part of the theater subsidizing another. Not everyone, after all, partakes in popcorn. They are only paying for the ticket to the movie and are therefore taking advantage of those who buy popcorn at a higher price point so ticket prices can economically be lower.

Another theory put forth by Mr. Landsburg suggests that since most movie goers go to movies in groups, it follows that some of them will want popcorn and some won’t. If a theater offers low popcorn prices and high ticket prices, those that don’t eat popcorn may not want to go. The same follows, visa-versa. The trick is to get both the popcorn and the ticket prices to a level both groups can agree upon.

This is economic theory backed up by the very theater owners that would be affected by such a law:

Yaacov Cohen, the owner of one of Israel’s largest theatre complexes, said owners made virtually no profit from ticket sales and would be hard pressed to survive if food sales were limited.

“It would destroy the entire industry,” he told Yediot.

Also, as a parting shot, it bears remembrance that those who trade $5 for a medium popcorn value the popcorn more than they do the $5. Even if said bags of popcorn sold at $100 per, the same holds true. And although the New Paternalists may have something to say about that (waiting periods for high-cost items, etc…), it is still a voluntary exchange, of nobody’s business but the two parties involved.

One last unintended consequence. Carmel Shama may well succeed in making high popcorn prices illegal. If so, people will no longer have to worry about mortgaging “their houses for a soft drink and a snack”. They’ll be doing that just to buy a ticket. Either that, or a whole lot of movie theaters will be going under.

[Cross-posted at Shrubbloggers.]


Filed under: Economic Theory, Market Efficiency, Nanny State, Unintended Consequences
Comments: 3 Comments
 

3 Comments »

  1. There are so many other problems for the Israeli MP to fix! I am tired of exceptionally expensive concessions at the zoo, over-priced drinks on airplanes, and pricey swag at concerts.

    Comment by Audrey — April 1, 2010 @ 8:55 am

  2. For American theaters at least, I have been given to understand there is another reason: the contracts with movie studios for movie tickets. According to one of my college professors in business (whose name I have forgotten over the last decade) most (if not all) movie theaters have deals with the motion picture studios that the first week or two that a movie is shown a huge percentage, from 90-100%, of ticket sales actually go to the studios, not to the theater. Only after the initial few weeks, and of course the largest portion of total viewing, does the theater make any money off of ticket sales. (This is also apparently why you can never get free/discount tickets that work for movies that are newly released.) As a result, the theaters are trying to make money in a sideways fashion, in this case by selling expensive snacks, but also on commercials shown before the movie and other recent developements. In essence, theaters are giving away the tickets for free, and making money for peripheral activities, from their perspective.

    It will be interesting to see what the results of this law are in Israel. I don’t know what their motion picture distribution system looks like, but if it is like the USA’s it could really kill the industry as it works currently.

    Comment by Eric Hammer — April 1, 2010 @ 9:46 am

  3. Hi,

    I just saw your blog through cafe hayek. Amazing. I just happened to have written a detailed rebuttal about shama’s shameful law in today’s online Ynet, the online yediot aharonot, for those who speak hebrew or want to use google translate.

    I said pretty much exactly the same as what you said!

    Anyone who speaks hebrew go there and comment!

    Comment by Amir Weitmann — April 1, 2010 @ 3:46 pm

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Henry Hazlitt"[T]he whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."
Henry Hazlitt, Economics in One Lesson
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