[...] Each of us decides at home how early to arrive trading off the cost of our time versus the probability of getting stuck in the front row. The “winner” of the auction is the person who arrives earliest, the prize is the best seat in the theater, and your bid is how early to arrive. It is “all pay” because even the loser pays his bid (if you come early but not early enough you get a bad seat and waste your time.)To me, it's interesting that the movie theater is taking advantage of an inopportune situation. If the theater chose to not show pre-movie advertising, there will always be a moment where there's a theater full of people who are staring at a blank screen. It would be crazy to not advertise to a willing audience. Moreover, in the absence of advertising, it's unavoidable to have people sitting there with nothing to do. It reminds me of the line at the grocery store: an unavoidable advertising opportunity.
In an all pay auction bidders have to randomize their bids. Because if you knew how everyone else was bidding you would arrive just before them and win. But then they would want to come earlier too, etc. The randomizations are calibrated so that you cannot know for sure when to arrive if you want to get a good seat and the tradeoffs between coming earlier and later are exactly balanced.
As a result most people arrive early, sit and wait. Now the previews come in. Since we are all going to be there anyway, the theater might as well show us previews. Indeed, even people like me would rather watch previews than sit in an empty theater, so the theater is doing us a favor.
And this even explains why theater tickets are always general admission. Let’s compare the alternative. The theater knows we are “buying” our seats with our time. The theater could try to monetize that by charging higher prices for better seats. But it’s a basic principle of advertising that the amount we are willing to pay to avoid being advertised at is smaller than the amount advertisers are willing to pay to advertise to us. (That is why pay TV is practically non-existent.) So there is less money to be made selling us preferred seats than having us pay with our time and eyeballs.
From this perspective, some advertising seems desirable for everyone involved. For most people, advertising is a complementary good to watching the movie. Even for those people who consider advertising a bad thing, it is probably a necessary evil to fill the awkward silence before the movie showing. Indeed, to borrow Jeff Ely's line, the theater is doing us a favor, but then they continue to do us this favor, and show another 20 minutes of previews.
In a world where everyone thinks that the pre-movie advertising is a nuisance, why show any advertising after the lights dim? In 1993, Gary Becker and Kevin Murphy wrote a paper that answers this question. From their analysis, it turns out that advertising can be a good or a bad from the perspective of the consumer, but it can work in either case. Take two examples of advertising that works:
1. Beer advertisements on television usually work by giving us a good laugh that causes us to remember the product the next time we show up at the store. In fact, one of the reasons that people watch the Super Bowl is to see the new advertisements. This is an example of advertising as a good. To most people, it isn't surprising that this works.
2. The beggar on the street with the cardboard sign makes you feel terrible (it enters negatively into your utility function to walk past him), so you put money in his box. People will cross the street (or change their walking route) to avoid beggars. They'll rarely cross the street to happen across the beggar to give him money. This is an example of advertising that is a bad, but works nonetheless.
So, let's return to the question of why the movie theater annoys us by showing 20 minutes of previews. I'm inclined to think that the advertising works, but I am not sure how much the advertiser benefits from showing the ads. That's a difficult question to sort out. I wouldn't be surprised if the people who pay for the ads pay much more to air the ads than they are worth.
As to the question of why people show up for the ads: Maybe people don't want the worst seat (as Ely suggests), but it is also likely that people don't want to show up to a dark movie theater. And, we can't rule out the possibility that people just like seeing those silly previews.