Tuesday, June 3, 2008

High popcorn prices in cinemas

Regular working lunch at the recently opened Rajiv Gandhi International Airport in Hyderabad costs an exorbitant Rs 300 per plate! (didn't check out other prices, but am sure the mark up would be substantial) The airport operator has sought to maximize his concession revenues by selling rights to only one restaurant concessionaire in each of the four floors. The monopoly pricing power confers on the concessionaire the freedom to charge these high premiums.

The 35 km commute distance between the airport and the city center, and the uncertainties associated with traffic congestion means that passengers invariably arrive a little earlier and spend more time at the airport. This, coupled with the fact that passengers leave their workplaces or homes a good three to four hours before the scheduled flight departure, means they are more likely to have skipped their lunches. The irregular airline schedules only increases the amount of time the passenger spends in the airport. The restaurant concessionaire now has a captive market in the airport, with passengers having to spend more time than they otherwise would have. (The only danger is whether the concessionaire may have priced himself out of the market!)

Restaurants in airports is only one of many examples of such primary-secondary product linkage markets. In the airline market itself, food sales in the low-cost carriers are another example of such markets. Recent studies from Stanford and the University of California, Santa Cruz seem to suggest that high prices charged in cinema theatres for concession items like popcorn, candy and ice cream (secondary products) help keep cinema ticket (primary product) prices low. This makes it possible for more people, like the price-sensitive ones, to view cinemas. While the cinema exhibition hall owners have to share ticket prices with distributors, they keep the entire profits from sales of secondary products.

Comparing concession purchases in weeks with low and high movie attendance for a chain of movie theaters in Spain, Wesley Hartmann, associate professor of marketing at the Graduate School of Business, and Ricard Gil, assistant professor in economics at University of California, Santa Cruz, proved that pricing concessions on the high side in relation to admission tickets makes sense. The fact that concession sales were proportionately higher during low-attendance periods suggested the presence of "die-hard" moviegoers willing to see any kind of film, good or bad-and willing to purchase high-priced popcorn to boot.

Gil says, "If you want to bring more consumers into the market, you need to keep ticket prices lower to attract them. And theaters wisely make up the margin by transferring it to the person willing to buy the $5 popcorn bucket." They also found that moviegoers who purchase their tickets over the internet tend to buy more concession items than those who purchase them at the door, by phone, at kiosks, or at ATMs.

The study found that people who come to the movies in groups tend to buy more popcorn, soda, and candy. As Hartmann says, if this is true then "it may be that theaters will want to run more family- or adolescent-oriented movies to attract a more concession-buying crowd ".

The study provides strong support for adopting similar strategy in all business ventures that involve a primary and many secondary products. It is also a vindication of the captive market hypothesis, with its contention that getting consumers to the party is the important thing. Once they are there, unlike the cliched horse, getting the consumers to buy is easier! Getting them there in the first place is the challenge!


Kartik Chandrasekharan said...

Wonderful post. Transfer pricing explained in the best possible way. Landsburg also explains the same in one of the chapters of his books 'Armchair Economist'

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