Metering Price Discrimination

Really interesting paper in Marketing Science this autumn by Gil and Hartmann on metering price discrimination.

Lots of firms sell optional secondary products to customers who purchase some primary one. Movies sell popcorn to those who purchase tickets, your cable TV company sells HBO to those who are otherwise subscribers. And what we frequently observe is that these secondary products are sold with markups that are significantly larger than the principal product.

It isn't obvious why this should be the case.

If the demand of the marginal consumer in the secondary market is less that the average secondary demand of all those who buy the primary good, then the firm will optimally charge a premium. Which is to say that movie theaters who charge larger markups for concessions, and cable companies who charge a larger markup for HBO or Cinemax, are making a specific assumption about their marginal customer. Namely: that the last guy to buy your main product has a lower willingness to pay for the second product.

Now this might -- or might not be -- true. But it's easy to imagine why we might suppose that the last person to buy a ticket to Avatar is just as likely to want popcorn as anybody else. One interesting modeling insight in this paper is to look at the weekly attendance numbers of movie theaters and compare those with the per-customer amount of concession sales. If average concession sales per person are negatively related to attendance, then larger markups are the right policy.

This is because weeks with high attendance are pulling in people who otherwise wouldn't go to the movies -- they are going even though they normally have a low willingness to pay for movies, but some movie of particular interest gets them in.

As it turns out, with the data set they have on movie theaters in Spain for a few years, this is exactly what we observe. A question and an observation.

First, how do these results translate to other industries? Razors and blades, cable TV and premium movie channels, etc?

The observation is that we can't suppose that theater operators have adopted this policy with this analysis in mind. It is a case where the habits of an industry seem to have been adopted by nearly all participants simply because it works. In applying this sort of analysis to other industries, it's a good idea to remember that the current policy might be accidental -- and to point out what assumptions that policy is implicitly making about the behavior of the market.