There’s a welfare impact when movie theaters charge higher prices for popcorn, that much is obvious. The intuitive guess would be that the movie theater benefits and customers lose out; consumer surplus goes down, producer surplus goes up. The slightly more nuanced take is that consumers are also better off, because if the theater couldn’t charge a price above marginal cost, then they wouldn’t be able to cover their fixed costs and therefore wouldn’t sell popcorn at all. But say that the price is already high enough that fixed costs are covered so that the movie theater would be willing to supply popcorn. Surely, any price increase above that must benefit only the producers at the expense of consumers, right?
It turns out that even at the margin, and even given that price is already high enough to cover costs, higher popcorn prices may make consumers overall better off. How can this be? This paper explains that total consumer welfare can go up when producers use “metered” price discrimination. This is where consumers are charged more for “aftermarket goods” (the popcorn) and charged less for the primary good (the movie ticket). This type of pricing scheme can benefit both producers and consumers; the theater can charge a lower ticket price, which means that some consumers who would have been priced out of seeing the movie instead choose to attend the movie at the lower price. The paper provides evidence that this type of price discrimination is in fact occurring.
So the next time you’re barely willing to pay the ticket price to see a movie, thank the customers grumbling about their $10 buckets of popcorn.
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Monday ~ December 14th, 2009 at 12:25 pm
Leigh Caldwell
Thanks, I hadn’t seen that paper.
I am continually having to defend price discrimination against people who think it’s “gouging” or somehow “unethical” (you may have seen this link on MR).
So a few months I wrote the following: Price discrimination is economically efficient. I’m currently participating in a consultation with the UK’s competition authority which is considering whether to regulate behavioural pricing in some way, so I’ll be sure to point them to this post and the paper you cite.
Monday ~ December 14th, 2009 at 7:22 pm
Adam Ozimek
Leigh,
Very good illustration in your post. I remember the same example from a textbook but with a small town doctor instead of butcher. That sounds like a very interesting project you’ve got, will you be posting about the experience at your blog?
In case you missed it, there was a post at marginalrevolution today involving third degree price discrimination. I’m always impressed and intrigued when someone can figure out a way to pull that off.
Tuesday ~ December 15th, 2009 at 1:14 pm
Leigh Caldwell
Hi Adam
Thanks for your comments – yes I had seen the MR article which is quite cute.
I’ll link to the results of the consultation (and my submission to it) when ready. Mostly the authorities in the UK are fairly sensible, so I don’t expect any draconian restrictions, but I think they do tend to be fairly orthodox in their ideas about economics and regulation. So I wouldn’t be surprised to see some kind of disclosure requirement for price discrimination schemes or behavioural pricing.
I might argue against this on the grounds that some “mental goods” can provide utility to consumers only when they don’t know about them… for instance premium pricing of Veblen goods provides a benefit to consumers, but if the fact is pointed out to them at the point of purchase, the benefit probably disappears.
Perhaps a good analogy would be a movie regulator requiring disclosure of movies that have a plot twist at the end, to let consumers make a “free choice” of whether to attend it or not. I hope nobody would argue for that!
Tuesday ~ April 20th, 2010 at 6:45 pm
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[...] comparable scenario is my example of movie popcorn that Matt Yglesias cited. The reason that price discrimination is occurring here is that the price [...]