Thursday, July 29, 2010

Econ 101: Price Discrimination

The Oregon State Beavers have finally learned a little something about price discrimination.  The Oregonian reports that they have increased seat sales by lowering prices - wow, who would have guessed? But you don't always want to sell every unit of a product that you can, especially when you have market power.  This is the lesson of the monopolist.

Consider the example of a downtown parking lot, you might wonder why, if a lot regularly has empty spaces, the lot owners don't just lower the price?  The reason is of course that to fill the lot they may have to lower the price so much that their total revenue actually goes down.  This is because they have to charge the same price to all of their customers.

The way around this is price discrimination which in this case means charging different customers different prices based on their willingness to pay.  Parking lots do a little of this, charging reduced all-day rates to customers that park before a certain time - the idea is that parkers who come in later in the day face a more competitive parking environment and are less price sensitive.

The general rule is that the more you can price discriminate the more you are willing to sell because selling more no longer means that you have to charge lower price to everyone. It is also generally true that the more you are able to price discriminate the more revenue you will be able to make.

In the case of a football stadium, price discrimination is easy: you can still charge a high price for the best seats while reducing the price of the more marginal seats, just as OSU has done.  Before you pass judgement on OSU for being so dense no to have figured this out before you have to realize that there is a constraint: you don't want to make it so attractive that folks that would normally pay for expensive seats find the good deal too tempting and would opt for the cheaper ones.  

An example of this that I have recently encountered is the current Timbers season ticket sales.  They started selling them first to 'priority groups' starting with current season ticket holders.  Now these would likely consist of some of the highest willingness-to-pay folks, but the Timbers also made a bunch of $99 season tickets available from the outset - and these were apparently so tempting even with their less desirable location that they were snapped up right away by the 'wrong' folks.

This decision confuses me - I would have thought that they would not have reduced the price of seats to such a low price until after season ticket sales had been opened up to non 'priority' folks.  But I guess the $99 price was a marketing gimmick to get people to consider season tickets from the start.

The difficulty in trying to get the 'right' people (the low willingness-to-pay people) to buy the low price tickets is a general difficulty in price discrimination.  When you can't tell the willingness-to-pay of customers it becomes tricky to design a pricing scheme that gets people to self-select into the right categories.  Clearly if the goal of the $99 Timbers tickets was to get marginal fans to become season ticket holders, it failed.  So whether the Beavers were smart in reducing the price of these tickets depends on whether people that would not normally have attended a game buy them or whether customers swap high priced tickets for these.  Apparently, as overall sales have increased, it looks like mostly the former.

No comments: