Allowing outside food in cinema halls will push up ticket prices

Food in cinema halls has been in the news as some State governments have ostensibly come out against exorbitant charges for snacks sold in theatres. Recently, the Maharashtra government allowed bringing outside food items into cinema halls. The Supreme Court has lately stayed a Jammu and Kashmir High Court order of allowing outside food. Theatres charge a lump-sum fee for cinema ticket and in the theatre, they levy a per-unit charge (PUC) for anything else bought inside. The non-cinema pleasantries cost a hefty sum to the customer inside the theatre, often costlier than the ticket itself.

On their part, the multiplex and theatre lobby claim they operate on as little as 5 per cent profit. The food and beverage they sell in concession stands account for 25-30 per cent of their revenues. They argue they suffer as half of what remains after paying GST goes to the film distributors and the rest covers electricity, labour costs, air-conditioning, and facility maintenance.

The theatre lobby argues they try to keep film ticket prices lower by charging higher prices for snacks inside. So, high inside food prices subsidise the cost of cinema watching. This argument is quite plausible and has found substantive support in economics research. In a 2009 paper titled ‘Empirical Analysis of Metering Price Discrimination: Evidence from Concession Sales at Movie Theatres’ published in Marketing Science , economists Ricard Gil and Wesley Hartmann have found that such a pricing strategy of cinema halls is a profitable price discrimination policy.

How much a customer demands the after-market goods (example, popcorn in concession stands) provides a meter of how much he/she is willing to pay for the primary good (admission to movie-watching). If his/her tastes for the two goods are positively correlated, a high price on secondary good (food/drinks) enables theatres (firms) to extract a greater total price (admissions plus concessions) from higher-end customers.

Gil and Hartmann found that high-priced concession goods do extract more surplus from customers with greater willingness to pay for the admission ticket.

Two-part tariff

In fact, it is not just about your cinema ticket. When you have an Amazon Prime subscription, emplane an IndiGo Airlines flight, or use a credit card, you may have noticed such pricing. Such a pricing structure is called “two-part tariff” in microeconomics or marketing.

The two-part tariffs, originally postulated in 1971 by Walter Oi in a paper titled ‘A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly’, published in the Quarterly Journal of Economics , consist of a lumpsum fee and then a PUC. This leads to optimal pricing and profit outcomes for the firms enjoying some monopoly-type market power.

This pricing structure helps the firm capture more consumer surplus than it otherwise would in a context where it cannot exercise such price discrimination (charging different prices from different types of buyers at different times and quantities). When consumer demand is homogeneous, the firm which exercises price discrimination usually sets the lumpsum fee lower than the PUC.

The PUC may exceed or equal the marginal cost of production but the total price is not. When consumers demand the good differently, the firm can extract even greater profits by setting lower lumpsum entry fee and higher PUC.

Empirical evidence suggests the relatively richer consumers whose demand is relatively less price elastic (that is, they do not worry about higher prices) purchase food and drinks inside the theatres. Moreover, it is reasonable to believe the human temptation for consumption of snacks can be suppressed for 2-3 hours only if consumers exercise due restraint. The consumers are never under duress for buying stuffs inside.

If outside food items are allowed inside freely and the theatres are made to bring down the prices of food stuffs in the concession stands inside, then, the film theatres are likely to raise cinema ticket prices to recoup foregone profits. Then, as theory predicts, the consumers will be worse off on net.

The writer is Assistant Professor of Economics at IIM Amritsar. Views are personal.