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A student of mine forwarded this Yahoo finance piece to me:

Are you infuriated every time you open your cell phone bill? Livid when you buy a snack at the movies? These are some of the rawest deals around.

Movie Theater Popcorn — 900% Markup

A medium bag of popcorn costs just 60 cents to make but retails for $6, a whopping 900% markup. That’s enough to make “Avatar” fans turn blue.

Richard McKenzie, an economics professor at University of California-Irvine, says theater owners mark up the snack so much because they don’t make a profit elsewhere.

McKenzie, author of the 2008 book “Why Popcorn Costs So Much at the Movies: And Other Pricing Puzzles,” says that out of your $10 movie ticket, only a tiny percentage goes to the theater’s profits.

“Popcorn is what pays for a lot of stuff in the movie theater,” McKenzie says. “A lot of theater owners tell me, ‘I consider myself working in concessions, not movies.'”

My very quick response is this:

Take popcorn for example, if what you care about is popcorn, then you might argue that you are being “ripped off.” Of course, there are two caveats. First, how can people be ripped off if they can voluntarily choose to make such purchases? A more proper way of thinking of it is that consumers are forking over more of their surplus than they would prefer. For example, if I would pay at most $15 for popcorn, and I only have to pay $2, my “consumer surplus” is $13. If I have to pay $10 for popcorn, I am still happy to do it, but the net pleasure I get from that purchase is smaller – now only $5. Second, for most of us, the good we are consuming is not popcorn – but rather the “movie theater experience.” If you take Professor McKenzie’s analysis seriously, which I do, then the movie theater would have to charge much higher prices if it sold popcorn for less, or perhaps it would shut down altogether. The popcorn pricing strategy is a good way to creatively finance your operation.

Furthermore, there is no shortage of competition in the movie theater sector (or most of the ones they cite). Is it plausible that all theaters can agree to keep popcorn prices high just to rip us off? Not really. In fact, it would be impossible to maintain such a large cartel. And theaters are free to test out all kinds of pricing strategies. That we do not observe this tells you something about pricing. Finally, there are lots of easy and cheap substitutes for the movie theater experience, yet the popcorn price persists.

Looking at mark-ups tells us nothing about whether we are being ripped off.

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