Economic Foundations for Entertainment and Media

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Economic Foundations for Entertainment and Media

• Pricing and Value for Experience Goods

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Demand and Value

• Demand and Demand Curves
• Prices
• Reservation price
• Value
• Bargain
• Pricing
• Pricing strategies
• Price discrimination
• Pricing innovations

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An Important Aspect of Prices for Experience
Goods The Implicit Price
Lady Gaga and Tony Bennett, The Axis, Las Vegas,
4/10/15
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An Important Aspect of Prices for Experience
Goods The Implicit Price

• Nominal price 675
• Implicit price far more than 675
• Transportation ( Parking Any ancillary costs)
• 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 purpose.
• TIME IS THE REAL CONSTRAINT

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Value

• What is it?
• From the consumers viewpoint
• From the sellers viewpoint
• Creating Value
• Capturing Value
• Meaning
• Sources of value

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Pricing and Value from the Consumers
ViewpointReservation price reveals willingness
to pay.
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Reservation PricePrice 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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Price and Value
What are the reservation prices in this
discussion? Consumer surplus?
Is it ethical to buy something at a yard sale or
a flea market at the sellers asking price if you
know the value of the item to be significantly
higher than what is being asked? Lets 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
its always a construct, provisionally defined by
a capricious market and the locality of the
transaction. Things cost what they are being sold
for, and theyre worth whatever the seller can
get. Look at it like this Lets 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, youd
gladly fork over 5,000. Would you feel the need
to inform the seller, You know, Id actually pay
you 3,000 more than what youre asking? I dont
think you would, and no one would expect you to.
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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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The profits that can be obtained 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. These are willingness to
pay. Therefore, demand curves slope downward.
This is the total consumer surplus that can be
extracted from all stages of this market.
Price
Pm
Quantity
Qm
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Event Consumer Surplus
Price15 9,000 people are
willing to pay 70 20,000 people
willing to pay 60 (including the 9,000)
40,000 people willing to pay 30 (including
the 20,000) 56,000 people willing
to pay 20 (including the 40,000)
64,000 people willing to pay 15 (including the
56,000)
Price Per Ticket
90 80 70 60 50 40 30 20 10 0
9,000(55) 495,000
11,000(45) 495,000 20,000(15)
300,000 16,000(5) 80,000
1,370,000
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Tickets (1000s)
0 8 16 24 32 40 48 56 64
If all 64,000 tickets are sold at 15, revenue
960,000. Is it possible to do better? How can
promoters capture the consumer surplus in markets
like this?
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Scalpers andSellouts
Promoters could sell out the concert at
2,000/ticket, but they dont. Mork buys ticket
to Star Wars Bar Scene concert for 500. Values
ticket at 1,000 If Mork can sell the ticket for
gt 1,000, he will do so If Mork can only 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, 500 in new
surplus. 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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Scalping Reallocates the Surplus
Why does Ticketmaster care? Why is it
illegal? Should Hanna Montana, Bruce
Springsteen and the Spice Girls care?
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A Merger Made in Heaven
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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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Why does Bruce Springsteen care?
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Live Nation Also Owns Tickets Now

• Ticketmaster and Live Nation were opposed by DOJ
  but did merge in 2010.
• Tickets Now is LNEs own scalper.
• This is a vertical integration case.
• We will revisit later in the vertical integration
  section.

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Economic Foundations for Entertainment and Media

• Strategic Pricing for Experience Goods

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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 price elastity
• Changes in Income Recreation is the Normal Good
  (Recall Why do we work?)

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Elasticity
Less elastic
More elastic
Ticket Price
Less elastic
Change in Price
More elastic
Quantity of tickets
Change in Quantity
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Demand Curves from the Sellers Viewpoint

• Elasticity of demand
• change Q / change x
• Income, price
• Elasticity is a measure of sellers 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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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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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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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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Monopoly Pricing
Monopolist will price where MR MC. If MC gt 0,
this must be in the elastic region of the demand
curve. For a performance, MC 0.
Price
Elasticity gt 1(Elastic)
Elasticity lt 1 (Inelastic)
MC
D
Quantity
MR
If the elasticity is lt 1, the price is too low.
MR is lt MC. Basic theory would not predict that
a monopolist would price in the inelastic region
of the demand curve.
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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
Marginal Revenue
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An Index of Market Power
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Pricing Strategies

• Exploit pockets of market power
• Take advantage of market imperfections
• Exploit unusual market configurations

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New Broadway Math

• 2001 Record price 100 ? Producers 480
• 2006 Average price about 65
• 2006 Premium Seats (The Producers)
• 200-500 seats are now routine.
• Theater owners had underestimated the number of
  inelastic buyers.

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Concert Ticket Prices Live Nation Effect
Connolly, M. and Krueger, Al, Rockonomics
http//www.irs.princeton.edu/pubs/pdfs/499.pdf
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(No Transcript)
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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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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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A theory that might explain pricing in the
inelastic region

• Monopoly Pricing Model for TicketsQ(P,q,m),
  PPrice, qquality, mmarket conditions
• Pricing is cognizant of a second good
  Concessions C(R,P,q), Rconcession price
• Total profit from both TicketsConcessions
• 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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Research from Stanford GSB and the University of
California, Santa Cruz suggests that there is a
method to theaters' madnessand one that in fact
benefits the viewing public. By charging high
prices on concessions, exhibition houses are able
to keep ticket prices lower, which allows more
people to enjoy the silver-screen
experience. Indeed, movie exhibition houses rely
on concession sales to keep their businesses
viable. Although concessions account for only
about 20 percent of gross revenues, they
represent some 40 percent of theaters' profits.
That's because while ticket revenues must be
shared with movie distributors, 100 percent of
concessions go straight into an exhibitor's
coffers.
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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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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. Higher Marginal Fee (and lower Fixed Fee)
More people come to the park and spend more on
rides.
Theoretical result Charge a very high Entry Fee
and zero Marginal Fee. Disney Two part fees
1955-1982 One part 1982-now
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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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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Rye Playland, Rye NY