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August 2004 Discount Tickets Star on BroadwayMany theatergoers know there are differences in Broadway ticket pricing. But most don't realize the variety of prices available for a single show. That person sitting next to you in the back of the orchestra might have paid a premium by ordering over the phone. Or stood in line at a discount ticket booth and forked over half of what you did. Or received a coupon in the mail and … For Phillip Leslie, assistant professor of strategic management at the Stanford Graduate School of Business, this multi-tiered pricing practice, called price discrimination, is an avenue into the study of consumer-related information economics. Leslie figured that by studying the ticket sales data of one Broadway show he could investigate whether it was ultimately better for consumers, as well as businesses, if those firms charged one price or many. How would the two pricing approaches affect both consumer welfare (the difference between what consumers have to pay and are willing to pay) and producers' profits? Leslie evaluated the data for all 199 performances of a play, Seven Guitars, that ran on Broadway in 1996. Using a complex series of econometric models, he concluded that consumers weren't particularly hurt or helped by the practice of multiple pricing, while producers benefited slightly. "There has been a lot of theoretical literature about whether price discrimination was good or bad in terms of consumer welfare," he says. "My study was the first to answer that based on an analysis of data." Price discrimination is a practice used by companies that lack good information about customers, Leslie says. In the case of Seven Guitars, producers were particularly creative in their use of multiple pricing. They designated a whopping 17 categories based on everything from seat quality to special discounts. "I thought it was amazing that these guys had figured out how they could sell their products at so many different levels," he says. To conduct the study, Leslie figured it would be too complicated to use all 17 categories. So he condensed them into five: low, medium, and high quality seats, tickets purchased through coupons sent through the mail to potential customers, and seats bought at a booth located near Times Square, where tickets were sold at a 50 percent discount the day of performance. Then he constructed mathematical models with which he could determine how sales would be affected by tickets sold at this revised multi-price approach versus one price for all. Ultimately, Leslie found that consumers were largely unaffected by price discrimination relative to uniform pricing, even though producers experienced a 5 percent increase in profits. With a uniform fee, some of the consumers were forced to pay higher prices, while others were able to purchase tickets at lower cost than they might have paid otherwise. (The optimal uniform price was about $50.) "But on average, it looks like it didn't make much difference to consumers whether there was price discrimination or not," Leslie says. "In this one example, it looks like price discrimination is a good thing. Firms make more profit without harming consumer welfare." Leslie made a number of other findings as well. One of the most significant concerned the use of discount ticket booths. While the booths provided a significant source of revenue for the show's producers, Leslie concluded the producers would have made more money if the booths had reduced ticket prices 30 percent rather than 50 percent. The reason: A 30 percent discount would not be large enough to justify the inconvenience of waiting in line for some consumers, who would be likely to buy pricier discounted tickets over the phone. But even at the higher discount rate, shows were able to sell a significant number of tickets through the booth that would have otherwise gone unsold. "You're better off having a 50 percent discount than no sales at all," Leslie says. Leslie also studied why producers didn't lower prices or institute uniform pricing even in the face of fluctuating demand. About halfway through its run, for example, Seven Guitars' popularity plummeted after it failed to win a Tony Award for best play. As a result, more tickets were sold through the discount booth after that event than before. Leslie found that if the show's producers had used uniform pricing, they would have lost money when demand slipped. "[Price discrimination] helps them out when there's less demand," he says. "The firm doesn't end up losing as much money as it might otherwise. It's a safety net." His study has implications for other industries. According to Leslie, implementing a wide-scale multiple-pricing strategy, such as that used by the airline industry, involves installing costly computer systems. For that reason it's not applicable to most businesses. But, in some cases—like the hotel industry, where chains can spread the fixed costs over a large number of units—it might be an effective approach. Additionally, says Leslie, "as computing costs continue to come down and more and more information is being collected about consumers, we may see an increasing number of firms starting to do this type of thing." —ANNE FIELDS |
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Further ReadingPrice Discrimination
in Broadway Theatre
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Discount
Tickets Star on Broadway
