Consumer Economics
Research by
Phillip Leslie
Professor of Economics and Strategic Management
Stanford Graduate School of Business
FOR FURTHER INFORMATION: Helen K. Chang, 650-723-3358, Fax: 650-725-6750
Are Discount Tickets Good for Business?
November, 2003
STANFORD GRADUATE SCHOOL OF BUSINESS—Most Broadwayplays charge a startling variety of prices for tickets. That personsitting next to you in the back of the orchestra might have paid a premiumby ordering over the phone—or stood on line at a discount ticketbooth and forked over half of what you did.
For Phillip Leslie, assistant professor of strategic management at theGraduate School of Business, this multi-tiered pricing practice, calledprice discrimination, promised to provide a fruitful way to pursue hisinterest in what he calls "the economics of information."Specifically, Leslie figured that by studying the ticket sales data of oneshow he could investigate whether it was ultimately better for consumers,as well as businesses, if those firms charged one price or many. How wouldthe two pricing approaches affect both "consumer welfare"—thedifference between what consumers have to pay and are willing to pay—andproducers' profits?
What Leslie did was to evaluate the data for all 199 performances of aplay called Seven Guitars, which ran on Broadway in 1996. Using acomplex series of econometric models, he was able to come to theconclusion that consumers weren't particularly hurt or helped by thepractice of multiple pricing, while producers benefited slightly."There has been a lot of theoretical literature about whether pricediscrimination was good or bad in terms of consumer welfare," hesays. "My study was the first to answer that based on an analysis ofdata."
Price discrimination is a practice used by companies that generallydon't know a lot about what consumers are willing to pay. "It'ssomething firms do when they lack good information about customers,"says Leslie. In the case of Seven Guitars, producers wereparticularly creative in their use of multiple pricing, with a whopping 17categories based on everything from seat quality to special discounts."I thought it was amazing that these guys had figured out how theycould sell their products at so many different levels," says Leslie.
To conduct his study, Leslie figured it would be too complicated torely on every ticket pricing category used by the play's producers. So hecondensed them into five areas: low, medium and high quality seats,tickets purchased through coupons sent through the mail to consumers, andseats bought at a booth located near Times Square that sold tickets at a50 percent discount the day of a performance. Then he set aboutconstructing mathematical models with which he could determine how saleswould be affected by tickets sold at this revised multi-price approach vs.one price.
Ultimately, Leslie found that consumers were largely unaffected byprice discrimination relative to uniform pricing, while producersexperienced a 5 percent increase in profits. Specifically, with a uniformfee, a portion of consumers were forced to pay higher prices, while otherswere able to purchase tickets at lower cost than they might haveotherwise. (The optimal uniform price was about $50). "But onaverage, it looks like it didn't make much difference to consumers whetherthere was price discrimination or not," says Leslie. His conclusion:"In this one example, it looks like price discrimination is a goodthing," he says. "Firms make more profit without harmingconsumer welfare."
Through his analysis, Leslie made a number of other findings as well.One of the most significant related to the use of discount ticket booths.While they provided a significant source of revenue for the show'sproducers, he concluded, producers would have made more money if thereduction in price had been 30 percent as opposed to 50. The reason: Withthe lower discount, more consumers would be likely to buy pricier ticketsover the phone rather than less expensive ones at the ticket booth, sincethe discount wouldn't be enough to justify the inconvenience of waiting online.
At the same time, however, even at the higher discount rate, shows wereable to sell a significant number of tickets through the booth that wouldhave otherwise gone unsold. "You're better off having a 50 percentdiscount than [no sales] at all," he says.
In addition, Leslie also studied why producers didn't lower prices orinstitute uniform pricing even in the face of fluctuating demand. Abouthalfway through its run, for example, Seven Guitars' popularityplummeted, 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 thanbefore. Leslie found that if the show's producers had used uniformpricing, they would have lost a lot of money when demand slipped."[Price discrimination] helps them out when there's lessdemand," he says. "The firm doesn't end up losing as much moneyas it might otherwise. It's a safety net."
Does his study have implications for other industries? According toLeslie, implementing a wide-scale multiple pricing strategy, such as thatused by the airline industry, involves installing costly computer systems.For that reason it's not applicable to most businesses. But, in some cases—likethe hotel industry, where chains can spread the fixed costs over a largenumber of units—it might be an effective approach. Plus, says Leslie,"as computing costs continue to come down and more and moreinformation is being collected about consumers, we may see an increasingnumber of firms starting to do this type of thing."
Related Information
Price Discrimination in Broadway Theatre, Phillip Leslie, Rand Journal of Economics, forthcoming (PDFfile 
)
Consumers Feast on RestaurantRankings
Price Discrimination and Retail Configuration," Andrea Shepard, Journalof Political Economy, Vol. 99 (1991), pp. 30-53
Nonlinear Pricing, Robert B. Wilson, Oxford University Press,1993
