WE WILL, WE WILL, PRICE YOU!!!
LESSON DESCRIPTION
Students are members of a rock
band that has just been signed to play their
first concert. By analyzing data from actual
concerts, students learn about the
interaction of supply and demand and gain
a deeper understanding of how a price
system functions. They discover the effect
that different pricing techniques have on
the allocation of tickets and on the
distribution of ticket revenue. Students
then discuss possible goals for their band
including, but not limited to, maximizing
profits. Finally, they develop pricing
strategies consistent with these goals.
INTRODUCTION
Prices play an important role in a
market economy. They help determine the
amount of revenue sellers receive, they
send signals to producers to increase or
decrease output and they play a role in
allocating scarce resources among
competing uses.
The typical discussion of prices in
textbooks tends to be mechanical. Students
are taught that price is determined by the
interaction of supply and demand. Firms are
assumed to maximize profits and that this
accomplished by producing at the level that
equates marginal cost and marginal
revenue.
This view is simplistic. In reality
producers often have goals other than to
maximize profit. They also rarely have the
information necessary to make the marginal
cost equals marginal revenue calculation
that is presented in textbooks.
CONCEPTS
Demand
Supply
Price
Market
Allocation of resources
Profits
Revenue
CONTENT STANDARDS
Different methods can be used to
allocate goods and services. People, acting
individually or collectively through
government, must choose which methods
to use to allocate different kinds of goods
and services.
Markets exist when buyers and
sellers interact. This interaction determines
market prices and thereby allocates scarce
goods and services.
Prices send signals and provide
incentives to buyers and sellers. When
supply or demand changes, market prices
adjust, affecting incentives.
OBJECTIVES
Students will:
Determine the appropriate shape of
the supply curve and demand curve for
concert tickets.
Determine whether the current
price of tickets is the equilibrium price.
Determine whether profits are being
maximized.
Explain what a secondary market is
and how it functions.
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October 2010
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Discuss goals for a firm other than
profit maximization.
Analyze different pricing techniques
and explain the impact each has on the
allocation of resources and on the
distribution of revenue.
Develop a pricing strategy consistent
with a variety of different objectives.
TIME REQUIRED
Part A - one 40 – 45 minute period.
Part B - one 40 – 45 minute period.
Part C - one 40 – 45 minute period.
MATERIALS
Visual 1: Seating chart for Utica
Memorial Auditorium
Visual 2: Upward sloping supply
curve
Visual 3: Vertical supply curve
Visual 4: Screen shot of StubHub
Activity 1: Let’s Rock
Activity 2: Seating chart for Utica
Memorial Auditorium
Activity 3: Newspaper article on
Phish concert
Activity 4: Screen shot of StubHub
Activity 5: Carrie Underwood
concert information.
PROCEDURES
There are three parts to this lesson.
Part A examines the situation of a
concert where all seats are general
admission and sold at the same price.
Part B extends the analysis to the
more usual case of concerts where there
are multiple prices and tickets are for a
specific seat.
Part C asks students to come up
with a pricing strategy for their band’s
upcoming concert given a variety of
possible objectives.
PART A
1. Put students in groups of 4 or 5
and tell them that they members of a band.
Give them a couple of minutes to come up
with a name and a type of music they play.
2. Distribute copies of Activity 1 and
2 to students.
3. Tell students that in order to help
make a decision about how to price and
distribute the tickets to their concert, they
will first examine how the band Phish has
chosen to do this for their concert in Utica.
Distribute copies of Activity 3 to each
student. Have students read the newspaper
article.
4. Ask the following questions.
A. “How big is the Utica Memorial
Auditorium (“Aud”)? “(5500)
B. “What was the price of a ticket to
the Phish concert?” ($60)
C. “The concert is “General
Admission”. What does that mean? “ (A
ticket gets you into the auditorium. Tickets
do not have seat numbers on them. You
may sit in any seat that is available.)
5. Ask students to draw a supply and
demand diagram showing the market for
tickets to the Phish concert at Utica.
Most students probably will draw a
graph looking like this:
P
S
$60
D
5500
Draw this on the board or show
Visual 2. Tell students that the class is going
to discuss whether this is a good illustration
of the market for Phish tickets in Utica.
First discuss the shape of the supply
curve. Remind them that the supply curve
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shows the quantity of a good that a firm or
business is willing and able to supply at a
set of prices.
Ask students
A. At a price of $60, how many
tickets were available? (5500)
B. “What if the price of a ticket to
the Phish concert had been $20? How many
tickets would the Aud have made
available?” (5500).
C. “What if the price had been
$100?” (Again, 5500.)
D. “What does this suggest about
the shape of the supply curve? Try graphing
the three points (at prices of $20, $60 and
$100).”
(The supply of seats is 5500
regardless of the price. Therefore, the
supply curve should be drawn as a vertical
line. In the short run it is reasonable to treat
the supply of seats as fixed.)
Next discuss the shape of the
demand curve. Remind them that the
demand curve shows the quantity of a good
that a firm or business is willing and able to
purchase at a set of prices.
Ask students:
E. “What does a downward sloping
demand curve indicate? What does it say
about the relationship between the price of
tickets and the number of tickets that
people are willing and able to buy?”
(At high prices, fewer people are
willing and able to buy tickets than at low
prices.)
F.” Is this reasonable? Why might
this occur?”
(Yes this is reasonable. People have
different preferences; some are huge fans of
Phish and would be willing to pay more than
others. People also have different incomes,
which affects the amount that they are able
to pay.)
This suggests that the graph for
tickets should look like this: (Show Visual 3)
P
S
D
5500
Q
G.” Is $60 the equilibrium price of a
ticket? How do you know?”
(No. The article stated that the
concert sold out in 18 minutes and that
there were people in line who did not get
the chance to buy a ticket. These people
were willing and able to purchase a ticket
for $60, but there were no more tickets
available.
Therefore the equilibrium price of a
ticket – where supply equals demand – is
higher than $60.)
H. Ask students: “Identify where a
price of $60 would be on the above graph.
What characterizes the market at this
price? “
P
S
$60
D
5500
Q
(At $60 there is a shortage of
tickets.)
6. Another piece of evidence to suggest that
$60 is not the equilibrium price is that
tickets are selling for more than $60 in the
secondary market.
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October 2010
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Explain to students that a secondary
market represents people that have
purchased the tickets from the Utica
Auditorium or Ticketmaster at the original
price and are now trying to resell them at a
profit. Most students will recognize that this
is commonly referred to as “ticket scalping”.
7. Handout Activity 4 and show Visual 4. Tell
students that this is a screenshot of
StubHub, the largest ticket reselling site.
StubHub works similar to Ebay. Stubhub
does not own the tickets for sale on its site.
Individuals post their tickets and the price
they are asking on StubHub for a fee.
A. “How much are tickets being sold
for on StubHub?”
(The cheapest ticket is selling for
$86. The majority of tickets are selling for
between $100 and $200. The highest posted
on the site is for $2500.)
B. Ask students: “You have decided
to go to the Phish concert. Unfortunately
you were not able to buy a ticket before
they were sold out. So you decide to buy
one on StubHub. Who are you going to buy
it from? How much is it going to cost you?”
(They should purchase it from the
first person listed at a price of $86. Remind
students that for this concert, all tickets are
General Admission tickets. This means that
every ticket is identical to any other ticket.
There is no reason to pay anything more
than the lowest available price.)
C. “What market structure best
illustrates the secondary market for Phish
tickets at the Utica Aud?”
(Perfect competition. There are
many sellers and buyers. The goods are
identical. There are no barriers to entry.
Anyone with a ticket can resell it on
StubHub.)
D. “Does it appear that the pricing
structure for the Phish concert (all General
Admission tickets at $60 each) is maximizing
profits? How do you know?”
(No, for two reasons. One, the price
is below equilibrium. The information on
StubHub suggests that people are willing
and able to spend more than $60 for a
ticket. They could have increased the price
of a ticket and still sold out.
Two, the band has sold all the tickets
for the same price. Show Visual 1 again.
Someone sitting in the front row in FLR B
will have paid the same amount as someone
sitting in section 210 at the far end of the
Auditorium. It is reasonable to assume that
the value of these two seats is not the
same.)
E. “Why might the band have chosen
to price tickets at a level below
equilibrium?”
(Possible explanations are that the
band did not want to appear greedy, they
wanted to guarantee a sellout, they wanted
the publicity of selling out quickly, they
wanted the money up front, etc. Students
may suggest the band feels that loyal fans
couldn’t afford to pay more than $60. This is
similar to, but not exactly the same as not
wanting to appear greedy. This will be
discussed in more detail later.)
F. “Why might the band have chosen
to sell all of the tickets as General
Admissions tickets at the same price?”
(This is a difficult question. Perhaps
it is cheaper to sell identical tickets rather
than tickets for specific seats. This doesn’t
appear to be very likely. A more plausible
explanation is that the band did NOT want
price or first come first served to buying
tickets to determine who gets to sit in the
best seats.” See the following question.
G. Ask students: “If all tickets are
General Admission, what determines who
gets to sit in the best seats?”
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(Whoever enters the arena first. The
arena has announced that doors will open
at 6pm on the night of the concert.
Therefore it is expected that fans will start
lining up well in advance of this time. This
means that seats will be allocated by the
ability and willingness to pay with one’s
time as opposed to paying with one’s
income or wealth.)
H. Ask the students, “Why might the
band want access to the best seats
allocated in this way?”
(The perception is that the most
enthusiastic fans are likely to be the ones
willing to give up their time, rather than the
ones that are willing to give up their money.
And the band not only wants to reward
these fans, but the band also benefits by
having these people in closest proximity to
the stage.)
8. To summarize, remind students that one
of the characteristics of free markets is that
price allocate goods and services. This
means that tickets will go to those people
willing and able to pay the market price. Ask
students:
A. “In this case, did price allocate
Phish tickets in the primary market? If not,
why not? And what did?”
(No. Price did not allocate tickets in
the primary market. Demand exceeded
supply. Therefore, first come first served
determined who got tickets and who did
not. )
B. “What is allocating tickets in the
secondary market?”
(Price is allocating tickets in the
secondary market. Prices can be expected to
fluctuate in order to balance supply and
demand.)
PART B
1. The characteristics of the previous pricing
strategy are very simple (all tickets are
General Admission and sold at the same
price). This makes the analysis as simple as
possible. But most concerts are not priced
in this way. Tickets for concerts at
Auditoriums are usually for a specific seat.
And most often there are at least two
different prices for tickets. This next section
addresses the analysis of concerts of this
type. (As an example, the accompanying
materials are for a Carrie Underwood
concert at the Bridgestone Arena in
Nashville, TN on October 13, 2010.)
2. Choose an artist that is currently on tour.
To find an artist you can either go to the
website of an auditorium or arena near you
or go to www.ticketmaster.com for a list of
artists. Choose a concert that is coming up
in the next month or so. Then go to the
website of the arena or ticketmaster to find
out the initial price of the tickets (often
referred to as the face value). Make sure
that tickets are for specific seats and there
are at least two different ticket prices. It is
preferable, but not necessary that the
concert be sold out. Also make sure that
there is a secondary market for tickets. Go
to www.stubhub.com and check to see if
the concert is listed, or simply google the
name of the band and the word tickets
(Lady Gaga tickets). You should get a
number of hits of secondary sellers.
3. Once you have chosen the concert, print
out a copy of the seating chart and an ad or
webpage advertising the concert. An
alternative is to provide students with the
link to websites containing this information.
As an example Activity 5 includes the
information for the Carrie Underwood
concert in Nashville, TN on October 13,
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2010. All provided answers are for this
concert.
closer to profit maximization than the Phish
concert was.)
4. The analysis of this situation is very
similar to that in part A, but it is
complicated by the fact that each ticket is
for a specific seat. A ticket to a seat in the
front row is very different from a seat far
away or behind the stage.
D. Does information from the secondary
market confirm or contradict this view?
(It confirms it. In general the asking price of
tickets is higher for seats closer to the stage.
This suggests that each seat is slightly
different, as measured by the distance from
the stage. This suggests that each ticket has
a slightly different value. The more “ticket
prices” the more potential revenue the
concert will earn.
5. Ask students:
A. How many different prices are being
charged for tickets?
(Three. $55.00, $45.50 and $35.50)
B. What differentiates a $55.00 from a
$45.50 or $35.50 seat?
(The higher priced tickets are those closer to
the stage. These include the floor seats in
sections 1 through 6 and parts of sections
105 through 107 and 114 through 116. The
further from the stage and the higher up,
the lower the price of the ticket.
C. Are all $55.00 tickets the same?
(No, the face value of tickets in sections 1
and 4 are $55.00, but tickets in section 1 are
closer to the than those in section 4.
Therefore seats in section 1 are better or of
a higher value than those in section 4. Even
within a section seat value differs. Seats in
row 1 of section 1 are better than those in
row 8.)
D. What does this suggest about the pricing
strategy for the concert? Is it maximizing
profits? Is it closer to profit maximization
than the Phish concert?
(By pricing all tickets in sections 1 and 4 the
same, the band is giving up potential
revenue. If someone pays a ticket in the last
row of section 4 for $55, it means that they
value the ticket for at least $55. Therefore
tickets in rows closer to the stage must be
worth more than $55. Therefore this does
not maximize profits. But by having three
different price levels the pricing strategy is
PART C
1. Remind students that since they are
acting as their own manager they must
develop a pricing strategy for its upcoming
concert in Utica, New York. Then discuss the
questions.
1. What objectives or goals could you have
for this concert that will affect the price you
charge and the method of distributing the
tickets?
(These could include:
1) Making as much money as possible. Be
careful to make sure that students
understand that maximizing revenue is not
necessarily the same as maximizing profit.
Profit equals revenue minus cost. There
could be some pricing strategies that collect
more revenue, but they may also include
additional costs.
2) Selling the concert out as quickly as
possible. This could be for egotistical
reasons. It could also be a way of
generating publicity. It used to be that a
primary goal of concerts was to increase
record (CD) sales. Ticket prices were kept
low in order to make sure that the
maximum number of people attended the
concert. In other words, concerts were
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subsidized CD sales. Today technology has
turned things around almost 180 degrees.
Because of Napster and the ease of sharing
audio files, CD sales and therefore, revenue,
has fallen. Now bands often give away the
music in hopes of getting people to come to
the concert.
3) Ensuring that the bands “real” or “loyal”
fans get tickets and more importantly, the
best tickets. Often these are not the people
with the most money.
4) Keep ticket prices low, but prevent
scalping of tickets. The reselling of tickets is
very controversial. Some states ahve laws
prohibiting reselling of tickets for more than
a token amount over face value, but these
are becoming rarer. Bands don’t like ticket
scalping because their fans are paying near
equilibrium prices for tickets, but the ticket
broker is profiting, not the band.
2. Before asking students to come up with
the band’s choice of how to price and
distribute tickets, ask them to answer the
following questions.
A. How should tickets be sold if the goal is
to earn the highest profit possible for the
band? This generally means getting the
highest price for each ticket possible, but
the cost of the plan should be considered as
well.
(While there are many possible
plans, they should all have some things in
common. For instance, there should be
many different prices. A seat in the front
row is worth a little more than a seat in the
fourth row, which is worth more than a seat
in the tenth row, etc. In addition, a seat in
the middle of the tenth row is worth more
than a seat on the far right or left of the
stage in the tenth row. Therefore, a
proposal to price each seat separately and
sell them like on StubHub could potentially
be a solution. The technology is available
that would allow this to be fairly easy to
accomplish. There is still the issue of what
price to place on each ticket.
If all tickets were sold online, ticket
prices could initially be set very high and
then lowered if demand was not enough to
sell of the tickets. Setting too high a price,
still allows the firm to adjust its price if it
turns out too high. Initially setting too low a
price does not provide the band the same
flexibility. Once the ticket is sold, nothing
can be done. If the band were playing a
concert at the same venue every week
(such as Cher or Celine Dion in Las Vegas)
prices could be adjusted in the long run, but
in most cases, ticket pricing of a concert it is
a onetime event.
Another alternative would be to
auction off each seat, similar to how many
goods are sold on eBay. This could be
accomplished online with current
technology. A number of questions would
have to be addressed, such as, how long to
have the auction. Bands and auditoriums
want to have as much time as possible to
know how much revenue is coming in. In
addition, it eliminates the positive “buzz” of
a fast sell out. )
B. What if the primary goal is to get the
tickets to the band’s most loyal fans?
Assume that these fans are not the ones
that would be able to pay the highest prices
for tickets?
(The problem is how to figure out who is a
“loyal” fan.
Some bands have fan clubs and allow
these members are given preferences in
buying tickets before they go on sale to the
public.
Bands on occasion have limited the initial
sale of tickets to a geographic region (a
neighborhood or city) where they started
out or have received significant support.
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The most common solution is to substitute
waiting in line for willingness to spend
money as a means of allocating tickets. This
is effective if loyal fans are willing and able
to show their demand using their time,
rather than money. College students have
long shown a willingness to wait in line for
days for concert and/or football tickets.
Make sure that students understand that
the true cost of a ticket becomes the
monetary ticket price plus the value on
one’s time. This proposal is not foolproof.
There is nothing to keep a wealthy person
from purchasing a ticket from someone that
had waited in line. Or even to pay someone
to stand in line for them.
This is more difficult to accomplish since
most tickets are now sold online. Phish’s
decision to sell only General Admission
tickets and then allow queuing to determine
who gets the best seats is an example of
how this can be accomplished with online
ticket sales. )
C. What if the goal is to keep prices low,
but prevent the reselling (scalping) of
tickets?
(A variety of techniques can be used.
For one tour, Bruce Springsteen sold the
very best tickets – around the first 20 rows –
in a very unusual way. Ticket sales were
online and limited to four per person. But
the actual tickets were not mailed. On the
evening of the concert, the buyer had to
show identification, including the credit card
that was used to purchase the tickets
online, and then was escorted to his/her
seats. This made reselling the tickets very
difficult. But this was extremely expensive
for the arena, as well as time consuming for
ticket holders.
3. Now that the groups have had some
practice coming up with pricing strategies
for a number of possible objectives, it is
their turn to determine what goals they
have for their band and to develop a plan
for selling tickets to the show that is
consistent with this goal. Students do not
have enough information to put an exact
dollar figure on the tickets, but they should
be able to set parameters on how many
different prices they will charge, how tickets
will sold and distributed, etc.
The evaluation of the program should
focus on how well the strategy is likely to
meet its goal.
SUMMARY
1. True or false, if a band is interested in
maximizing profits it should use more
pricing categories rather than fewer.
(True. Each seat is slightly different from
any other seat. You can think of each seat
having its own vertical supply curve and
downward sloping demand curve. Since the
demand will be slightly different for each
seat depending upon its location, there will
be a different equilibrium price for each.)
2. Bands get positive publicity from selling
out concerts. That helps explain why bands
are willing to price tickets below
equilibrium. Can you think of any other
business that “under prices” their product
in order to benefit from a shortage?
(Popular restaurants often have long lines
and waiting lists on the weekend. Rather
than raise the price in order to equate
supply and demand, the restaurants are
happy to have excess demand since it is a
sign of popularity. And people are more apt
to think that a crowded restaurant is a good
restaurant than one that is empty.)
3. What are some other goals firms might
have other than maximizing profits?
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(Maximizing sales or market share, having a
good reputation, pleasing customers,
making a contribution to society.)
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Visual 2: Supply and Demand I
Price
S
60
D
5500
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Tickets
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Visual 3: Supply and Demand II
Price
S
D
5500
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Tickets
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Activity 1
Congratulations!!! Your band has been together for over four years and
after playing countless small clubs and free festivals you have finally signed a
contract to play your first arena show. You are scheduled to play a concert
at the Utica Memorial Auditorium on May 4, 2011. In an attempt to keep
your costs at a minimum, the band has been acting as its own manager. One
of the decisions the band will have to make is how to price and distribute
tickets for the concert. Before making a decision you are going to analyze
the pricing mechanisms used by other artists.
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