Popcorn and Other Pricing Puzzles
If popcorn is overflowing on business school professor Richard McKenzie's desk, he's probably not suffering from a snack attack. More likely, he's exploring an economics dilemma of the sort contained in his new book, Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles (Copernicus Books, 2008).
McKenzie, the Walter B. Gerken professor of enterprise and society at the Paul Merage School of Business at the University of California-Irvine, says he uses his research into pricing anomalies to keep students interested and to make what they are studying relevant to their lives.
Typical of McKenzie's interests is a recent paper that notes the average weight of Americans has increased 24 pounds since 1960, and how that has had a direct impact on gasoline prices. He contends Americans are using 1 billion gallons more gasoline per year hauling all that extra weight around, and airlines are using 1 billion gallons of additional jet fuel. And that extra demand contributes to the rising costs of gas (BusinessWeek.com, 6/3/08).
"My inconvenient truth for Al Gore is you can save polar bears by going on a diet, at least if it's done nationwide," says McKenzie.
One of the key themes running through McKenzie's book is that the "obvious" reason for pricing disparities isn't necessarily the real reason. For instance, popcorn isn't costly at the theater because of a captive audience, he explains. Rather, it's the more complicated outcome of an antitrust ruling involving movie theaters 60 years ago. (He explains some of this in a YouTube video.)
Recently, McKenzie spoke with BusinessWeek.com reporter Francesca Di Meglio about his book and some of the pricing puzzles that are occupying his mind. Here are edited excerpts of their conversation:
What motivated you to write this book?
I didn't intend to write a book as I started out. I just started investigating various pricing puzzles that interested me. Of course, popcorn is one of those things. I teach MBA students, and I'm always looking for good business-related puzzles to assign them. Then, I only undertook those that didn't seem to have the possibility of having a counterintuitive explanation. Most people think they charge you so much for popcorn because there's no competition in movie theaters—they have this big, bad monopoly, and they can just stick it to you once you go through the turnstile. I found the explanation is a bit more difficult than that.
The same thing is true about ink cartridges in printers. I took that one up because I bought a new computer for my home, and Dell (DELL) voluntarily threw in a free printer. That was fine, but a month or two later when I ran out of ink, the cartridge replacement was $74. That became a puzzle. Why do they do this kind of thing? The argument that I develop in the book is that people have different volume usage and they also have different discount rates. If you are a low-volume user and you're not going to use more than one cartridge for say, three years, you want to buy a printer with a low printer price and high cartridge price. A high-volume user and a low-discount rate—you'd want a high-priced printer and low cartridge price.
What are the most interesting pricing puzzles in the book?
I would say, of course, that popcorn is No. 1. Also high on the list is the 9/11 puzzle, which shows that the September 11 terrorists, who are dead themselves now, killed more people since 9/11 than they did on that day. By driving the risk costs and price of air travel up and making it more inconvenient, the terrorists motivated people to drive their cars rather than take a plane, and the highways are deadlier than the airways.
The after-Christmas sale seems to attract a lot of attention. Many of my MBA students tell me stores have after-Christmas sales to get rid of unwanted inventory. I admit that might be true for the red-and-green shirt, but there are storewide sales after Christmas. You'd fire anybody who, year after year, persistently ordered excess inventory. The sales are not the result of miscalculations. The stores know that before Christmas, people are less price-sensitive than they are after Christmas. All they are doing is engaging in price discrimination. When they order their goods back in June, they have to anticipate their sales before and after Christmas.
What do you hope people do with the information in the book?
I'm not exactly sure. I wrote the book because these topics were of interest to me, and I gather they are of interest to a wide range of people. Whenever I mention the book, everyone feels like they have the answer. In the book, I convince them that their answer is not always the valid one.
Are you stumped by any pricing puzzles?
There was one I feel I solved only after the book went to press. I have a Vespa scooter. I was always dumbfounded as to why the Vespa dealership in Newport Beach (Calif.) would not take trade-ins. As I have used my scooter, I've realized that the cost of operating my scooter is higher than operating my Infiniti G35. Forget about the cost of the machine. Everyone points to the gas savings (BusinessWeek.com, 7/14/06).
I think you're going to have a lot of people sorely disappointed. I've had [the Vespa] for several years. At the time I calculated the costs, I was at 5,000 [miles]. It was costing me about 60¢ per mile. The gas is cheap, 50 mpg, which isn't all that great because it's a small vehicle. They advertise 70 and I've never been able to get that, but I'm just putting to and from the office and coffee shop. I think what happens is that people focus on the gas mileage because it's salient.
Then they get the scooter or Vespa and realize that it's expensive. The tires wear out and need replacement, every 2,000 miles you have regular maintenance at $400 to $450, and sometimes things go wrong and it needs repairs. People realize this is not the overall cost savings that they expected. They put it on the used scooter market, depressing the price of used scooters. The reason Vespa dealers don't carry used scooters and don't take trade-ins is because if they had them on the floor, they would immediately alert buyers to the substantial depreciation of the scooter within the first 12 months.
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