Entertainment and
Media: Markets and
Economics
Price Discrimination
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Price Discrimination
Pricing and Value from the Consumer’s Viewpoint
Market prices and willingness to pay
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Price Discrimination
Perfect Price Discrimination
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First degree discrimination
Every consumer pays their reservation price
The seller extracts all surplus value
Profit is maximized absolutely; This hypothetical situation is the
best the seller could possibly do.
Price
Marginal Cost
Demand
Quantity
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Price Discrimination
Attempt to apply first
degree price discrimination
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Yield Management: A form of price discrimination
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Fixed, perishable product
Low (or zero) marginal cost
Segmentable markets
Applications
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Airlines: Timing of sales; fare classes
Hotels: Timing of sales, length of stay
Car Rental: Insurance and damage waivers, upgrades
Sports: Quality of seats for dozens of configurations
Concerts: Bundling, backstage passes
Online sales (attempts, e.g., Amazon)
Price Discrimination
A General Rule for
Price Discrimination
(Strategic Pricing)
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Extract consumer surplus where there are opportunities
Greater profit extracted from the less elastic buyer
Rule: (Price – Marginal Cost)/Price
= price cost (profit) margin
= 1 / |Price Elasticity|
Generally means higher prices charged to less elastic
demanders
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Price Discrimination
Market Segmentation
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Different prices to different buyers of the same
commodity
Making it work
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There must be real segments
The segments must be kept apart – no sales across
segments
Examples of market segmentation by elasticity
Senior citizen discounts at movies
 Men’s and women’s shirts at dry cleaners
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Price Discrimination
Third Degree Price Discrimination:
Monopoly pricing in each segment
Inelastic Market
Segment:Movies;
General Admission
P,MC
Elastic Market
Segment: Movies;
Kids, Seniors
PHIGH
PLOW
Tickets
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Price Discrimination
Market Segmentation
For every single price regime, there is a two
price regime that is more profitable.
(Assuming market segments exist.)
Separable Markets; Assume
MC = 5.
One Price = 8,
Revenue = 8(4)+8(28)=256
Profit
= 256-5(32) = 96
Two Prices:
PL=5, Revenue=50
PH=11, Revenue=242
Total Revenue=292
Profit = 292-5(32) = 132
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Price Discrimination
Two Segment Market
Why do the elasticities differ?
How can North Holland prevent arbitrage?
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Price Discrimination
Two Price Regime at Amazon Prime
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Price Discrimination
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Price Discrimination
Magic
Pricing
Kingdom
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Price Discrimination
Airlines do it. Hotels do it. Sport venues and concert halls do it.
And, to the irritation of car-less urban travelers, so does Uber.
Now the Walt Disney Co. is jumping on the bandwagon with demand-based
pricing, too.
The company announced that because "the demand for Disney Parks continues
to grow, especially during peak periods," seasonal pricing will now be applied to
1-day tickets at both Disneyland in California and Walt Disney World in Florida.
Disney says new ticket pricing, which has already gone into effect, is designed to
"help spread out visitation," but it means higher prices will be charged during
the most popular periods (such as holidays and summer weekends) and lower
prices during slow seasons, such as September, when kids go back to school.
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Price Discrimination
Dynamic Pricing
Elements of pricing by
attributes. Attributes
change over time and
elasticities change when
they do.
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Price Discrimination
Pure dynamic pricing: Elasticity varies by time (over day, week, season).
Dynamic pricing might also
work for commodities priced
on the internet.
Time of Purchase
Another tactic implemented by the airline industry is changing prices based on the time of day.
They do this using analytics to determine the time of day at which most of their customers are
purchasing tickets and charge higher prices at those times. This allows them to increase revenue
and tailor their prices to the demand on the site. It is a little known secret that Amazon uses
similar techniques and changes their prices multiple times a day to match the demand for an item.
This type of variable pricing is harder to use than the other two because it requires constant
monitoring to determine the appropriate price. Amazon and others have developed algorithms
that do this for them and as these algorithms improve it is likely that more businesses will use
time based pricing.
http://spinnakr.com/blog/ideas/2013/08/variable-pricing-models-work-for-tech-startups/
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Price Discrimination
Since 2011, the show’s producers, Disney Theatrical Productions, have
been relying on a previously undisclosed computer algorithm to
recommend the highest ticket prices that audiences would be likely to
pay for each of the 1,700 seats at every performance in the Minskoff
Theater. While other shows also employ this so-called dynamic pricing
system to raise seat prices during tourist-heavy holiday weeks, only
Disney has reached the level of sophistication achieved in the airline and
hotel industries by continually using its algorithm to calibrate prices based
on demand and ticket purchasing patterns.
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Price Discrimination
Are owners
really pricing
irrationally?
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Price Discrimination
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Price Discrimination
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Price Discrimination
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Price Discrimination
Second Degree Price Discrimination
 Quantity discounts
 Smaller purchaser generally has the less elastic
demand.
 Applications:
 Groceries
 Multiple site theme parks (Disney)
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Price Discrimination
Quantity Discounts at Disney World
Number of Parks
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Price Discrimination
Quantity Discounts at Disney World
Number of Days
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Price Discrimination
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Price Discrimination
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Price Discrimination
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Price Discrimination
Market Segmentation by Attributes
Differentiation by product attributes
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Key element: Price difference exceeds marginal cost
difference
Less precise than direct segmentation by identifiable
characteristics of buyers
Applications
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Special seats in Manhattan movies
Versions of software
Books: Hardcover vs. paperback
Concert seats
Tickets to all sorts of entertainment events
Ticket Pricing by “Value”
Price Discrimination
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Price Discrimination
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Price Discrimination
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Price Discrimination
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Price Discrimination
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Price Discrimination
Price Discrimination in Concerts. About 5%
impact on gross revenues
The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry, P.Courty and
M. Pagliero, Review of Economics and Statistics, 94, 2012, 359-369.
Frequency of price discrimination
for acts with > 300 concerts.
Discrimination defined as more than a single ticket price, e.g., floor vs. bleacher.
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Price Discrimination
Real Differences in Aesthetics Not
Proportional to Marginal Cost
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Black Mac $1499
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White Mac $1349
What was going on here?
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Price Discrimination
Real Functional Differences Not
Proportional to Marginal Cost
$300 for 2GB of memory and
90GB on the hard drive.
Marginal cost near zero.
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Price Discrimination
$85 includes license fee for Yankees lid. The license fee is less than
$85/computer.
$0 for black. $40 for Pink, Red, Blue, Green, Purple. The marginal
cost of the different colors is close to zero. Notice the marketing; not
Green, “Jade Green.”
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Price Discrimination
High Flying
Price
Discrimination
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Price Discrimination
“Business Class” for movie goers
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Price Discrimination
More Price Discrimination
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Price Discrimination
The Producers Price Index
Price discrimination based
on two attributes, seat
location in the theater and
weekday & time.
Further promotional
discounts, day of show via
TKTS = 3rd dimension of
discrimination based on risk
of not seeing the show.
Estimated impact on theater
profit (compared to a 1 price
strategy) 5%
Price discrimination in Broadway theater, Phillip Leslie, The RAND Journal of Economics Vol. 35, No. 3
(Autumn, 2004), pp. 520-541
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Price Discrimination
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Price Discrimination
1.
2.
3.
4.
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Place of the seat relative to the stage.
Programming
Time and date of the show
Time of purchase
Price Discrimination
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Price Discrimination
Pricing Downloads
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Price Discrimination
Hard Cover US v UK Version; 9/13/07
₤50.34 = $102.30
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Price Discrimination
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Price Discrimination
International Pirated Edition: Very Low Price!
Renmin
University of
China
All 827 pages
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Price Discrimination
A 2003 Mets Price Experiment
2001-2: Discriminate by seat location
2003-4: Discriminate by seat location and date/matchup
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Price Discrimination
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Price Discrimination
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Price Discrimination
Yankee
Stadium
Pricing
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Price Discrimination
Two Aspects of Pricing Strategy
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Cannibalization: Price tiers are not skillfully
constructed
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Bundling: Selling separate but related products
together
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Price Discrimination
Cannibalization
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Two level pricing system – the lower level may
cannibalize the higher one
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If the two prices are too far apart, the surplus from the lower
priced alternative may exceed that from the higher one.
Potential inelastic (high price) buyers may be drawn to the
lower priced segment.
Strategies
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Careful setting of the difference between high and low prices
When segmenting by attributes, ensure that the attributes
create real perceptible differences that consumers will value.
1:G - 53(61)
Price Discrimination
Lion King, Orpheum, SF
Segmentation by Attributes
1:G - 54(55)
Price Discrimination
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Price Discrimination
Bundling
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Applications
Cable TV
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Basic
Basic+Premium+Music Choice
Econometric Analysis 6th ed. with answers
What is the strategy? (Not specific to experience goods:
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Phone services
Car features
1:G - 56(61)
Price Discrimination
Time Warner Cable Bundles
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Price Discrimination
1:G - 58(61)
Price Discrimination
1:G - 59(61)
Price Discrimination
A music and shipping bundle
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Price Discrimination
THE Bundling Application
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Block booking by the movie studios
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THE PARAMOUNT CASE (1948)
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1:G - 61(61)
Forced rental of sets of movies
Blockbusters were bundled with dogs
Broke up vertical arrangements (studios
owning theaters)
Disallowed block booking
Price Discrimination