We found an article in Investopedia.com on Tuesday that questions the incredible mark-ups on movie theatre popcorn, greeting cards, college textbooks, bottled water, printer ink and designer fashions. (Click here for article). We could have guessed this list without the article as they are the typical examples we use in intermediate microeconomics classes when we discuss mark-up pricing.
The thing we find a little troubling, given the Tuesday blog on financial advice, is the following quote from the article which is on a site that offers investment advice:
At the grocery store, microwave popcorn runs about $3 per box, and each box includes three 3.5 ounce bags. So why on earth would consumers even consider paying a whopping $6 for a single medium-sized bag of popcorn in the movie theater? No one knows exactly why - but for some bizarre reason, movie-goers continue to drain their wallets to crunch on a bag full of those greasy little nuggets during their favorite film. (emphasis added)
We know why ... ELASTICITY!!! Elasticity is an economic measurement of consumer responsiveness to changes in price. The more substitutes for a product, the more consumers react to a price change by one producer. These products have elastic demands. If the product is a necessity or if it has no substitutes, consumers don't react to price changes. These have inelastic demand. The more inelastic the demand, the higher the price can be set.
Popcorn: goes hand-in-hand with theatre movies.
Textbooks: you must use the textbook I assign if you want to pass the course.
Ink cartridges: can't use a Canon cartridge in an HP printer
You get the idea. Economists 'know exactly why' and so do the profit maximizing firms that hire us.
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