It's Our Old Friend, Anti-Trust Law

North Carolina State economist Craig Newmark links to an article that attempts to explain why popcorn is so expensive at the movies, while remarking that such analyses alway leave him feeling he's missing something.

While the article does supply some interesting details, it clearly misses the underlying reason: The 1948 Supreme Court decision to break up the "monopolistic" movie industry by ordering a divestiture of the actual theaters from their studio owners.

The FLUBA's Entertainment Industry Analyst once had a lengthy discussion of this very issue with a Northwestern University economics doctoral candidate, which is preserved for future generations here (scroll down to the fourth entry by "dave955" to get to the meat of it). From that series of posts we excerpt:

...a brief history of the movie industry: Originally made up of numerous independent entities in three functional areas: Production of the films, distribution channels, and finally the actual showing of the movies in theatres. Just as Coase would have it, these independents were merged into larger firms because of the costs of transacting with each other.

By the 1920’s there were 5 major firms: Paramount, RKO, MGM, Fox, and Warner Bros., producing over 80% of American films. These 5 also owned about 50% of America’s movie theatres--mostly in large cities.

And what theatres they were! Often called Movie Palaces, they had sumptuous lobbies, often with huge chandeliers--that are today collected, selling for hundreds of thousands of dollars. I am old enough to have been in several, the Paramount still exists in Seattle, as a concert venue.

This was the "studio system", employing thousands (as actors, writers, directors, musicians, composers, cameramen, make-up and wardrobe, sound technicians, electricians etc), and owning huge amounts of real estate, and sets. In addition to the big 5, there were 3 others, Columbia, Universal, and United Artists.

The bulk of the studio profits came at the theatre level. There was little or no profit--due to the enormous costs--in actually making the movies. And it was done, as the old joke has it, on volume. In order to sell 100 million tickets per week, in a country of about 140 million, suffering (in the 30’s) the worst Depression in our history, prices had to be low.

The decline of the studio system--hardly monopolistic with 8 players competing with each other--came late in the 40’s when the Federal government, through several anti-trust suits, had the theatres broken off from the studios. What would happen to any industry that had to divest itself from 50% of its profitable activities?

What happened to Hollywood was that the studios then started making fewer movies, but bigger movies. Large-scale Westerns and Musicals, Ben Hur, The Ten Commandments, The Sound of Music, Cleopatra...Star Wars, Independence Day, Saving Private Ryan. The forced break-up begat the Blockbuster epic.

Market forces drove the small, independent entities that had been producing, distributing and showing the films, into about 8 large firms by the late 1920’s. The 8, pace Coase, could avoid the transaction costs of all the independents dealing with one another (and achieve economies of scale with such things as using warehoused stock footage, re-using sets and props). Thus, efficiency.

Then the government steps in and unscrambles the omelet, and we’re back to something like the original (less efficient) situation. Costs are higher, the public suffers.

Something like 40% of a theatre’s profit came from sales of snacks pre-divestiture. Probably more now.

The revenues from the popcorn have to be drawn indirectly now by the studios through higher rental prices. As late as the 1950s a child could attend a double feature at a theater within walking distance of his home for $ .25. A bag of popcorn was $ .10.

2004 dollars make that $ 1.65 and $ .66. Clearly well below what theaters are charging these days.