Maharashtra government recently allowed moviegoers to bring outside food into movie theatres from August 1. Further, the state will ask multiplex owners to reduce the prices of eatables sold inside the premises, State Food Supplies Minister Ravindra Chavan said.

The move has been hailed as populist as it will reduce the total cost of seeing a movie, the thinking goes. We argue here that the unintended consequence of this policy will be higher ticket prices at the box office window and thus a higher total cost of that night out at the movie theatre for the average cinema goer.

Why pay for exorbitant popcorn when you can bring your own snacks? One school of thought goes that in a theatre you are a captive audience and thus theatre owners are able to get away with higher food prices. This argument holds true for a 7-day ocean cruise where you are indeed a captive consumer but not for a 3-hour movie. Yes, you are a captive consumer, but you are only there for 2-3 hours, so the effect is not as strong. For one, you could just delay consumption by 3 hours if you didn't want to pay Rs 500 for that popcorn. People who buy popcorn are either less price sensitive (i.e rich) or have always envisioned the movie-going experience with popcorn in hand (i.e the two go hand in hand for them).

Theatres charging more for popcorn is an example of pricing secondary goods (concessions) richer and primary goods (the movie tickets) cheaper. It is in some sense like a freemium plan, where the primary product is priced cheap to get a lot of consumers interested. Some of them will buy the premium plan justifying the low price of the primary good. For similar such example think of the price of blades vs price of razors, and similarly price of ink refills and price of printers

The high price of popcorn in the theatre, thus, subsidizes the cost of the movie tickets allowing more people to enjoy the theatre experience. Research from Stanford GSB and the University of California, Santa Cruz has empirically showed the same — by keeping the food expensive, theatres are able to keep ticket prices lower. "The argument that pricing secondary goods higher than primary goods can benefit consumers has been circulating for decades, but until now, no one has looked at hard data to see whether it's true or not," says Prof Hartmann, one of the authors of the study. The evidence thus suggests, the high price of food at theatres actually benefits the average moviegoer.

Now from the theatre owners perspective, food sold in concession stalls at theatres have much higher gross margins (estimates from 70-85%) than ticket sale revenue (estimates from 20-30%) most of which have to be shared with the distributors and the producers. By allowing lower priced food in the theatre the government is in effect reducing the revenues from concessions which also happens to be the higher margin product. Faced with lower gross margins and lower revenues, the theatre owner then has two choices -

Absorb the loss of revenue from the secondary product and operate under lower margins. Less likely.

Increase the cost of the primary product i.e the theatre tickets to maintain previous margins. More likely.

We believe over time theatres will increase the base prices of all tickets to make up for the lost revenue. So, a populist policy move supposed to make the cinema-going experience cheaper will actually end up making it more expensive for the average moviegoers as buying tickets is mandatory while having food (buying from the concession stand or bringing from home) while watching a movie is optional.

Gaurav Rastogi is the CEO of Kuvera.in: a free direct mutual fund investing platform. Gaurav managed a pan-Asia quantitative portfolio for Morgan Stanley before he started Kuvera.

First Published:Aug 20, 2018 8:50 AM IST