Provided any customers denied admittance receive a refund I don't think I'd agree that it is an illegal practice. If they're not being up front about the practice I'd certainly agree it's going to cause a lot of frustration and, will probably damage their reputation and attendance long term, and as such it's an unwise business decision; but stupidity isn't illegal.
And, if they are not refunding patrons denied admittance it's more a civil matter than criminal (though it could certainly be argued that in this case, they're engaging in fraudulent activity by knowingly deceiving customers and selling the same seat twice - assuming they are not disclosing this fact).
I'm also not sure what your goal would be in going to upper management. According to your post, upper management has explicitly directed this behavior, so I'm not sure that a direct rebuke of the practice is going to bear any fruit.
If the practice is an affront to you in an ethical sense I'd argue that you have a duty to address it in some manner (it's a small industry, your reputation is important long term). You may suggest in writing (i.e. via email) that they modify the practice. Personally, I would use the analogy of an airline. Airlines regularly oversell flights, but when they do they are not confirming a specific seat number to oversold tickets. If the theatre is truly worried about empty seats, you may suggest that they sell each confirmed seat only once and then sell standby tickets at a lower rate in the event of no-shows. This could actually work to their advantage in that they're not going to refund the no-show, and have sold a second ticket to the standby customer.