Economic Foundations for
Entertainment and Media
Pricing and Value for Experience Goods
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Pricing Experience Goods
Demand and Value
Demand and Demand Curves
Prices
 Reservation price
 “Value”
 “Bargains
Pricing



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Pricing strategies
Price discrimination
Pricing innovations
Pricing Experience Goods
An Important Aspect of Prices for
Experience Goods: The Implicit Price
Lady Gaga and Tony
Bennett, The Axis,
Las Vegas, 4/10/15



Nominal price: $675+
Implicit price: $ far more than $657
 Transportation
 Time – at least 5 hours in total.
This divergence is characteristic of experience goods. They take
time to consume. The time used up having the experience is part
of the price. Choosing to see this concert means not using the
time for some other use. TIME IS THE REAL CONSTRAINT.
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Pricing Experience Goods
“Value”
 What is it?
 From the consumer’s viewpoint
 From the seller’s viewpoint
 Creating Value
 Capturing Value
 Meaning
 Sources of value
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Pricing Experience Goods
Pricing and Value from the Consumer’s Viewpoint
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Pricing Experience Goods
Reservation Price:
Price Strategy Under Uncertainty
Your reservation price is $2,500.
Auction to take place in 5 days.
What would you do now?
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Pricing Experience Goods
Price and Value
Is it ethical to buy something at a yard sale or a flea market at the seller’s asking price if you
know the value of the item to be significantly higher than what is being asked? Let’s say, for
example, someone is selling an old comic book worth thousands of dollars but asks for only
a quarter because he or she does not know the true value. Is it incumbent on the seller to do
his or her research? If the seller does not, is it fair game?
The operative word in your question is “true” directly placed before the word
“value.” You suggest the “true value” of a specific comic book is a few thousand dollars —
but all that means is someone might be willing to pay that much for it, based on extrinsic
qualities (rarity, for example). To the person running the flea market, the “true value” of the
comic book is virtually nothing. There is no “true value” for any object: it’s always a
construct, provisionally defined by a capricious market and the locality of the transaction.
Things cost what they are being sold for, and they’re worth whatever the seller can get.
…
Look at it like this: Let’s say the person at the flea market was selling that same
rare comic for $2,000. You, however, would be willing to pay far more than that; because of
its sentimental value and the status it will bring among your comic-book-collecting peers,
you’d gladly fork over $5,000. Would you feel the need to inform the seller, “You know, I’d
actually pay you $3,000 more than what you’re asking”? I don’t think you would, and no one
would expect you to.
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Pricing Experience Goods
Consumers Valuation of Products
Surplus Value: Consumers must perceive
“value” over price.
By Attributes: Hedonic Pricing
$3000+
The high price was one of the reasons for market failure.
Consumers did not get enough surplus value.
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Pricing Experience Goods
Appropriable Profits in a Market
Come from Consumer Surplus



Final demand for a good or service reveals the surplus
Stages in the delivery to the consumer may accumulate the surplus
Total appropriable rent in a market is generated at the final sale
Different buyers
have different
reservation prices.
Therefore, demand
curves slope
downward.
This is the total consumer surplus that can
be extracted from all stages of this market.
Price
Pm
Qm
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Quantity
Pricing Experience Goods
Event Consumer Surplus
Price Per Ticket
90
80
70
Price=15; 9,000 people willing to pay 70
20,000 people willing to pay 60 (including
40,000 people willing to pay 30 (including
56,000 people willing to pay 20 (including
64,000 people willing to pay 15 (including
60
= 9,000(55) = 495,000
= 11,000(45) = 495,000
= 20,000(15) = 300,000
= 16,000(5) = 80,000
= 1,370,000
50
40
30
20
15
the 9,000)
the 20,000)
the 40,000)
the 56,000)
10
0
0
8
16
24
32
40
48
56
64
Tickets (1000s)
How can promoters capture the consumer surplus in markets like this?
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Pricing Experience Goods
Scalpers
and
Sellouts
Mork buys ticket to Star Wars Bar Scene concert for $500. Values ticket at $1,000
If Mork can sell the ticket for > 1,000, he will do so
If Mork can sell the ticket for $500 - $1,000 he will just go to the concert.
Mindy values the concert at $1,600 offers Mork $1,100.
Mork sells the ticket. New surplus for Mork is $100
Mindy buys for $1,100 a ticket that she values for $1,600
The transaction creates $100 + $500 = $600 in new surplus value.
Price
2000
1600
1100
1000
500
Tickets
No one loses. Trade makes both people better off.
What could be wrong?
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Pricing Experience Goods
Scalping: Reallocates the Surplus
Why does Ticketmaster care?
Should Hanna Montana, Bruce
Springsteen and the Spice Girls
care?
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Pricing Experience Goods
A Merger Made in Heaven
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Pricing Experience Goods
Why We Worry About this Merger

Horizontal Issues: Will the large market share
enable them to raise prices?

Vertical Issues: Will control of venues and
artists enable anticompetitive practices?


Foreclosure from markets
Bundling
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Pricing Experience Goods
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Pricing Experience Goods
Live Nation Also Owns Tickets Now

Ticketmaster and Live Nation were opposed by DOJ

Tickets Now is LNE’s own scalper.

This is a vertical integration case.

We will revisit later in the vertical integration section.
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Pricing Experience Goods
Economic Foundations for
Entertainment and Media
Strategic Pricing for Experience Goods
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Pricing Experience Goods
Demand Concepts
 Consumer “response” to changed circumstances = the
extent to which quantity demanded changes when
price or income or something else changes
 “Elasticity” is the measure of “responsiveness”
 Response to changes in price
 Changes in Income – Recreation is the Normal Good
(“Why do we work?”)
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Pricing Experience Goods
Less elastic
Elasticity
Ticket
Price
More elastic
Less elastic
Change
in Price
More elastic
Quantity of
tickets
Change in
Quantity
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Pricing Experience Goods
Demand Curves from the Seller’s Viewpoint
 Elasticity of demand
 %change Q / % change x
 Income, price
 Elasticity is a measure of seller’s
market power
 Consumer surplus measures
consumers’ benefit from
consumption
 Sellers with market power can
(only) obtain profits in a market by
capturing consumer surplus
 The less elastic is demand, the
greater is the potential surplus
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Pricing Experience Goods
Applying Price Theory to Experience Goods
Different results from consumption:
Humdrum goods vs. Experience goods
 Implications for pricing and price strategies



The “price”
Monopoly pricing results
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Pricing Experience Goods
“Competitive Outcome”
Many sellers, many buyers
 Any seller can sell as much as they wish at the
“market” price
 No seller can sell at a price above the market
price
 No buyer has (or would take) an opportunity to
bid above the market price – there is no
shortage so no incentive to do so.

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Pricing Experience Goods
Market Power over Price

Seller (Monopoly) = Control over price



Set any price they wish
Price strategically recognizing that quantity sold will
depend on the price they set
Buyer (Monopsony) = control over purchase
price




Typically labor markets
Ford modeling agency
Professional sports
Silicon Valley engineers conspiracy (HP, Apple,…)
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Pricing Experience Goods
Monopoly Pricing
Price
|Elasticity| > 1
(Elastic)
MC
Monopolist will price where MR = MC. If MC >
0, this must be in the elastic region of the
demand curve. For a performance, MC = 0.
|Elasticity| < 1 (Inelastic)
D
Quantity
MR
If the |elasticity| is < 1, the price is too low. MR is < MC.
Basic theory would not predict that a monopolist would
price in the inelastic region of the demand curve.
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Pricing Experience Goods
Price Determination-Standard

In the presence of “market power”
Market power is the ability to elevate
price above the competitive norm.
Short run profit is obtained by transferring consumer
surplus from buyers to the seller.
P*
Marginal Cost
Demand
Qm
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Marginal Revenue
Pricing Experience Goods
An Index of Market Power
Interest in Price,
Quantity = Q(Price)
= Q(P) Demand Curve
Cost
= C(Quantity) = C(Q(P))
Look for the profit maximizing price (best price strategy)
Profit =  = P * Q(P) - C(Q(P))
Profit is maximized where d /dP = 0
d /dP = Q(P) + P*dQ/dP - dC/dQ*dQ/dP = 0
dC/dP is marginal cost, MC. Note also, dQ/dP < 0
Solve the equation and P = MC - Q/[dQ/dP] which is > MC
P - MC
1
=
P
Price Elasticity
Economic Result: Greater profit margin when demand is less elastic
Index:
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Pricing Experience Goods
Pricing Strategies
Exploit pockets of market power
 Take advantage of market imperfections
 Exploit unusual market configurations

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Pricing Experience Goods
New Broadway Math





2001: Record price: $100  Producers $480
2006 Average price about $65
2006: “Premium Seats” (The Producer)
$200-$500 seats are now routine.
Theater owners had underestimated the number of
inelastic buyers.
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Pricing Experience Goods
Connolly, M. and Krueger, Al, “Rockonomics” http://www.irs.princeton.edu/pubs/pdfs/499.pdf
Concert Ticket Prices: Live Nation Effect
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Pricing Experience Goods
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Pricing Experience Goods
The Pricing Conundrum in Major League Baseball
•
Empirical Models of Demand Produce Price
Elasticities between -1 and 0.


•
Team owners could raise revenue by increasing price
Are team owners pricing irrationality?
(I assume models that produce positive
elasticities are misspecified)
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Pricing Experience Goods
“A current finding in estimates of the gate demand for
sports events is pricing in the inelastic portion of
demand.” This finding has puzzled analysts who study
the demand for sporting events because it suggests that
owners could raise ticket revenue by raising ticket
prices.
Estimated Long-run Elasticities of Attendance
Elasticity
Real Ticket Price
ANA
-0.88
ATL
-0.57
BAL
0.72
BOS
0.57
CIN
1.95
CLE
2.74
DET
0.78
HOU
-2.31
KCR
-1.46
MIL
-1.14
MIN
-0.46
NYM
0.85
NYY
0.73
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Pricing Experience Goods
A theory that might explain pricing
in the inelastic region





Monopoly Pricing Model for Tickets=Q(P,q,m),
P=Price, q=quality, m=market conditions
Pricing is cognizant of a second good; Concessions
C(R,P,q), R=concession price
Total profit from both Tickets+Concessions
Ticket Price might be low to draw people to the
concessions.
(We will revisit this model later in the context of
movie theaters.)
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Pricing Experience Goods
Are owners
really pricing
irrationally?
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Pricing Experience Goods
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Pricing Experience Goods
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Pricing Experience Goods
Two Part Pricing Strategy: Movie
Studios to Retailers –
Videotapes
Tapes: Marginal Cost = $3.00
 One time: $70.00 - $80.00
 Revenue Share: $8/tape + x% of rental
 Unclear which was the better price strategy
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Pricing Experience Goods
The Disneyland Dilemma
Two part tariff (price):
Entry Fee
Fixed
Marginal Fee Per attraction
Higher Fixed Fee (and lower Marginal
Fee): Control the number of people
who come to the park. Extract $$ from
consumer surplus at the gate.
Theoretical result: Charge a very
high Entry Fee and zero Marginal
Fee. Disney: Two part fees 19551982; One part 1982-now
Higher Marginal Fee (and lower Fixed
Fee) More people come to the park
and spend more on rides.
A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly
Walter Y. Oi The Quarterly Journal of EconomicsVol. 85, No. 1 (Feb., 1971), pp. 77-96
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Pricing Experience Goods
Mixed Pricing Strategy: Adventureland,
Farmingdale NY
Allow customers to
sort themselves into
low and high elasticity
groups. (High ride
price elasticity buyers
will choose the POP
ticket.)
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Pricing Experience Goods
Rye Playland, Rye NY
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Pricing Experience Goods