Defending Dynamic Pricing

I’ve received several calls from reporters over the past few weeks to discuss a phenomenon that’s sweeping baseball: the “dynamic pricing” of tickets. In general, this means charging different prices for the same seats for different games. This may involve charging a higher price for rivalry games, weekend games, or the latest fad charging more for game-day purchases. All of these adjustments are designed to generate more revenue for clubs by varying the price of the ticket according to changes in fans’ willingness to pay for games.

I can see how fans might find such policies repugnant. A seat is a seat, the stadium’s in place, the salaries are set, and workers have been hired. What justifies the price increase? Joe Eskenazi expresses his frustration with the Giants dynamic pricing policy

The oft-quoted model for the new, likely soon-to-be-ubiquitous baseball pricing system is airline ticket purchasing. It’s almost certain readers have experienced first-hand the joys of last week’s $300 tickets this week being priced at $410. It’s a strong incentive to buy early before myriad contrived supply-and-demand factors are tossed into the algorithm and you end up paying through the nose. As noted before, inducing people to spend quickly and pinging those who do not is good business sense.

On the other hand, it just seems downright wrong that you should be made to pay more for a baseball game because it’s a “great day for baseball.” It seems exploitative that you should be made to cough up extra dollars when Tim Lincecum is on the mound; will we be given a deep discount when Zito is pitching or Pablo Sandoval takes a day off? Further following the airline model, will we be charged extra for using the restroom? Do clean seats cost more? Do I have to pay extra to stay out of the all-felon, all-drunk, all-jerks talking loudly about work on their iPhone section?

The act of charging different prices for different units of identical items is known to economists as price discrimination. While discrimination has pejorative connotations, in this sense the term merely describes the act of charging different prices according to different willingnesses to pay. There are several conditions that must be met for price discrimination to work, and baseball teams meet them all pretty well. And while successful price discrimination definitely increases profits, it also has the benefit of increasing output. For baseball, this means more, and sometimes cheaper, baseball for fans.

How does charging more for premium games benefit fans? For the fan who was previously able to buy a ticket for $20 who must now pay $25, that fan is certainly worse off. But, if he values attending the game at $25 or greater, then all that has been lost is consumer surplus—the difference between what a consumer is willing to pay and what he/she actually pays. That loss to the consumer is offset by the gains to the seller. If we’re not picking sides, the world has the exact amount of surplus as it used to have; all we’ve observed is a transfer of surplus from one party to another. It’s easy to see yourself as the fan who’s ticket price has gone up and be pissed about it. But, I’m not really all that sympathetic. People are paying a price for a product they value at that price or higher, I’m not seeing a downside. You used to be able to buy something you valued more for less, and now you have to pay a higher price that is still equivalent to or less than what you value the product. And when the product is a baseball game, cry me a river in the name of social justice.

But, that’s not the reason why price discrimination is a good thing. If you want to take sides with the fans paying a higher price, I’m not going to stop you. The blessing of charging different prices for a product is that it allows more units to be sold at a lower price. In a world were a seller chooses only one price for a product, it must be the one where it maximizes the gains from selling a few units at a high price and selling many units at a low price. Where that price occurs it’s going to result in some people paying prices less than they value the product and some having to pay more than they value the product. The former group will continue to purchase the product, but the latter group is priced out of the market—this is very bad.

Son: Hey dad, will you take me to see a baseball game? I’ve never been.
Dad: Sorry son, tickets are expensive and we can’t afford that right now.
Son: I don’t care what team we see. I just want to go to experience the ballpark. I’ll go see the Royals play on a cold night.
Dad: It doesn’t matter what the weather is or who’s playing. Tickets are tickets, and we can’t afford them right now.

But with price discrimination, those marginal fans have the opportunity to go to games when other fans value them less. (What you’re upset that poor people can’t go to big games? When world poverty is eliminated come back to me and we can discuss the moral importance of assuring poor people the right to see important games.) Fluctuating prices don’t just mean higher prices, they result in lower prices as well. The team now has the freedom to charge lower prices without losing revenue from all the fans willing to pay higher prices when games are in high demand.

If dynamic pricing goes away, so do the cheap seats. If you have to choose one price to maximize profits, it’s going to be one that prevents a lot of fans from going to the games, and that is a bigger tragedy in my mind.

10 Responses “Defending Dynamic Pricing”

  1. Dynamic pricing, of course, has been around for decades: that’s why my upper deck seats cost less than your box seats. My big problem with the push to raise game day prices isn’t dynamic pricing; it’s that I think the teams have supply and demand wrong. The fact that there are ample seats available on the day of the game means that tickets were priced above willingness to pay in the first place, and raising the price at the last minute doesn’t change that. Airlines can get away with last minute price hikes because there is (often) true urgency; you HAVE to be at that business meeting tomorrow and are willing to pay more. While you could argue fans may have this same sense of urgency, there is a big risk in alienating fans by discouraging them from attending games on nice days or when there is a great pitching match-up.

    Son: “Dad, let’s go see Lincecum tonight!”
    Dad: “Sorry, son, the team raised the price. You should have told me yesterday.”
    Son: “Ok, I’ll just go skateboarding with my friends instead.”

    There can be a long run cost to short run profit maximization, and I would think teams would be interested in encouraging fans to buy unused tickets.

  2. JC says:

    Game-day price fees has been implemented in several markets, and I can only assume the policy has increased revenues as the number of teams adopting the practice is increasing.

  3. Chad McEvoy says:

    From a sports marketing and PR perspective, I think teams using variable and/or dynamic pricing have really missed opportunities here over the past decade. If positioned correctly and coupled with sound target marketing (i.e. marketing higher-priced premium tickets to high-end clients and lower-priced tickets to the “common fan”), variable and dynamic pricing can help reduce the notion of “pricing out the common fan” that is so pervasive in pro sports today via JC’s rationale provided in this post. Teams have not been effective in framing the argument this way and have instead allowed the media and fans to take shots at them for raising the prices of premium tickets.

  4. Ken Houghton says:

    “Teams have not been effective in framing the argument this way…”

    Because they’re not employing “dynamic pricing” as economists, including JC, think of it. All of the “dynamic” pricing announcements have been “we’re going to charge more for” (see Baltimore, which raised prices on Yanks, RSox, and someone else, while not simultaneously announcing a drop for the Royals and As).

    Game-day (box office) price fees may well increase revenues to the club–I doubt it, or at least would like to see the research–because the box office price is still lower than buying beforehand with service fees. (Most stadia do not sell out every day anyway; no reason to pay $4.50 extra for mezzanine when I can pay $1 day of and get basically the same seat.)

    What I would like to see is how many of those day-of-game buyers are also buying for future games at that first attendance (without no surcharge). $1 extra over, say, four games you’re going to see anyway retains most of the consumer surplus. Only the ticket vendor loses.

  5. Mr.B says:

    Nota bene, dynamic pricing doesn’t just me that prices go up. The flip-side is that some games will be cheaper so that attendance will go up on “coach” class games.

    I live in DC, and occasionally go to a National’s game even though I’m a Mariners fan. If the Red Sox Nation is willing to pay through the nose to see the Red Sox play some interleague game – great! I couldn’t care less about those games, and I’ll happily pick a sunny day when some other random, less desirable team is in town. And since the Nat’s attendance is low in general, aside from certain aforementioned spikes, my intuition is that they’ll ratchet the price down to fill in some of that sea of empty seats.

  6. Millsy says:

    I had a similar post on my blog that no one reads (except my mom) a while back.

    Quick question though: While it’s the case that people walking up to the gate for the same game that others bought single game tickets earlier for is price discrimination, would we truly consider ticket pricing based on baseball quality to be PD as it’s defined in my old Econ text?

    Aren’t these technically different products, depending on the visiting team (or even the current quality of the home team)?

    In the end, it’s all getting at consumer surplus, but I think there’s a distinction between the two, as a quality (or perceived quality) change would shift the demand out, rather than alter the relative willingness to pay for the same game (though, depending on someone’s baseball snobbery, it could do both).

  7. Jesse G. says:

    “Nota bene, dynamic pricing doesn’t just me that prices go up. The flip-side is that some games will be cheaper so that attendance will go up on “coach” class games.”

    I realize that this is how dynamic pricing would work in a world where we have something approaching perfect price discrimination that helps maximize revenues but I am skeptical that, in practice, it will actually mean cheaper seats and more expensive seats depending on the game instead of just some games being more expensive. Does anyone have any good empirical data about whether any ticket prices for relevant seats or against relevant teams actually went down in terms of year over year prices (adjusting for the general increase from year to year) after a change from static to dynamic pricing models?

  8. JC says:

    Millsy,

    It depends on what you want to define as the market. If you want to say it’s the market for baseball games and that there is something wrong with charging different prices for different games (as the author of the post I cited was insinuating), then the PD model works well at explaining the differences and why they improve welfare. In the grand scheme of things, all goods are unique—except for public goods, which creates a whole new problem—and could be classified as different goods according to the law of one price. Economic models are designed to explain, and PD explains what’s going on here just fine.

  9. Will says:

    I went to one of the Giants’ dynamically priced games last season – a late season night game against the Dodgers when both teams were still in the wildcard race and Cain was pitching – and the price was offensive when I first saw it. But when I got to park I saw the point: sellouts. A sellout is more fun for the fans and more likely to help the home team win, and dynamic pricing allows the team to sell out their games instead of having expensive empty seats (it also helps them wring all possible dollars out of games they would have sold out anyway). So it does make sense and I’m OK with it. I still think their pricing model is arbitrary, though, and a simple auction mechanism could be even more efficient.

  10. Michael says:

    One reason that game-day price increases are successful is that, while the face value of the ticket increases, the actual cost to the fan often decreases.

    Here in San Diego, for example, game-day tickets cost $2 more than buying the ticket beforehand. But if I buy my tickets on the day, I buy them at the park, and the extra $2 per ticket still results in a net price reduction, compared to buying online. Buying at the park eliminates all the per-ticket and per-order fees that online purchases through Ticketmaster attract.