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.