Presentation on theme: "Entertainment and Media: Markets and Economics"— Presentation transcript:
1 Entertainment and Media: Markets and Economics Professor William Greene
2 Economic Foundations for Entertainment and Media Pricing and Value for Experience Goods
3 Demand and Value Demand and Demand Curves Pricing Pricing strategies Price discriminationPricing innovations
4 “Value” What is it? Creating Value Capturing Value From the consumer’s viewpointFrom the seller’s viewpointCreating ValueCapturing ValueMeaningSources of valueSlightly out of place, but an important concept, and they are going to want to talk about it.
6 Reservation Price: Price Strategy Under Uncertainty Your reservation price is $2,500.Auction to take place in 5 days.What would you do now?
7 Price and ValueIs it ethical to buy something at a yard sale or a flea market at the seller’s asking price if you know the value of the item to be significantly higher than what is being asked? Let’s 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: it’s always a construct, provisionally defined by a capricious market and the locality of the transaction. Things cost what they are being sold for, and they’re worth whatever the seller can get.…Look at it like this: Let’s 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, you’d gladly fork over $5,000. Would you feel the need to inform the seller, “You know, I’d actually pay you $3,000 more than what you’re asking”? I don’t think you would, and no one would expect you to.
8 An Important Aspect of Prices for Experience Goods: The Implicit Price Kelly Clarkson, Beacon TheaterNominal price: $170Implicit price: $ far more than $170TransportationTime – 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.
9 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.
10 Appropriable Profits in a Market Come from Consumer Surplus Final demand for a good or serviceStages in the delivery to the consumerTotal appropriable rent in a marketSurplus from the seller’s viewpointDifferent buyers have different reservation prices. Therefore, demand curves slope downward.This is the total consumer surplus that can be extracted from all stages of this market.PricePmQmQuantity
11 Scalping: Reallocates the Surplus Why does Ticketmaster care?Do Hanna Montana and the Spice Girls care?
13 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 marketsBundling
15 Live Nation Also Owns Tickets Now Ticketmaster and Live Nation were opposed by DOJTickets Now is LNE’s own scalper.This is a vertical integration case.We will revisit later in the vertical integration section.
16 Economic Foundations for Entertainment and Media Strategic Pricing for Experience Goods
17 Demand Concepts Prices Consumer Reaction to Changes in Price Reservation price“Value”“BargainsConsumer Reaction to Changes in Price”ElasticityLong and short run effectsConsumer Reaction to Changes in Income – Recreation is the Normal Good (“Why do we work?”)
18 Applying Price Theory to Experience Goods Different results from consumption: Humdrum goods vs. Experience goodsImplications for pricing and price strategiesThe “price”Monopoly pricing results
19 Demand Curves from the Seller’s Viewpoint Elasticity of demand%change Q/% change xIncome, priceLong run, short runMarket powerConsumer surplusRelation of surplus toprofits in a market
20 Pricing Strategies Exploit pockets of market power Take advantage of market imperfectionsExploit unusual market configurations
21 New Broadway Math 2001: Record price: $100 Producers $480 2006 Average price about $652006: “Premium Seats” (The Producer) $200-$500 seats are routine.Had underestimated the number of inelastic buyers.
22 Price Determination-Standard Under conditions of “intense” competitionIn the presence of “market power”Market power is the ability to elevateprice above the competitive norm.Short run profit is obtained by transferring consumer surplus from buyers to the seller.P*Marginal CostDemandQmMarginal Revenue
23 Monopoly PricingMonopolist will price where MR = MC. If MC > 0, this must be in the elastic region of the demand curve. For a performance, MC = 0.Price|Elasticity| > 1 (Elastic)|Elasticity| < 1 (Inelastic)MCDQuantityMRIf the |elasticity| is < 1, the price is too low. MR is < MC.Basic theory would not predict that a monopolist would price in the inelastic region of the demand curve.
24 Concert Ticket Prices: Live Nation Effect Connolly, M. and Krueger, Al, “Rockonomics”Concert Ticket Prices: Live Nation Effect
26 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 priceAre team owners pricing irrationality?(I assume models that produce positive elasticities are misspecified)
27 “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 AttendanceElasticity Real Ticket PriceANAATLBALBOSCINCLEDETHOUKCRMILMINNYMNYY
31 A Theory That Produces Pricing in the Inelastic Region Monopoly Pricing Model for Tickets=Q(P,q,m), P=Price, q=quality, m=market conditionsPricing is cognizant of a second good; Concessions=C(R,P,q), R=concession priceTotal profit from both Tickets+ConcessionsTicket Price might be low to draw people to the concessions.Marberger, D., “Optimal Pricing for Performance Goods,” Managerial and Decision Economics, 1997, 18, 5,
32 Examples Concerts and “Stuff” Sports and Skyboxes plus all the other stuff including foodMovies and the food concession stands
33 Two Part Pricing Strategy: Movie Studios to Retailers – Videotapes Tapes: Marginal Cost = $3.00One time: $ $80.00Revenue Share: $8/tape + x% of rentalUnclear which was the better price strategy
34 The Disneyland Dilemma Two part tariff (price):Entry Fee FixedMarginal Fee Per attractionHigher 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 ; One part 1982-nowA Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse MonopolyWalter Y. Oi The Quarterly Journal of EconomicsVol. 85, No. 1 (Feb., 1971), pp
35 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.)
37 Pricing and Value from the Consumer’s Viewpoint
38 Event Consumer Surplus Price=15; 9,000 people willing to pay 7020,000 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 Ticket908070605040302010= 9,000(55) = 495,000= 11,000(45) = 495,000= 20,000(15) = 300,000= 16,000(5) = 80,000= 1,370,00015Tickets (1000s)How can promoters capture the consumer surplus in markets like this?
39 A General Rule for Price Discrimination Greater profit extracted from the less elastic buyerRule: (Price – Marginal Cost)/Price= price cost (profit) margin= 1 / |Price Elasticity|Generally means higher prices charged to less elastic demandersAlways greater profits than a single price
40 Perfect Price Discrimination First degree discriminationEvery consumer pays their reservation priceThe seller extracts all surplus valueProfit is maximized absolutelyPriceMarginal CostDemandQuantity
41 Yield Management: Attempt to apply first degree price discrimination Yield Management: A form of price discriminationFixed, perishable productLow (or zero) marginal costSegmentable marketsApplicationsAirlines: Timing of sales; fare classesHotels: Timing of sales, length of stayCar Rental: Insurance and damage waivers, upgradesSports: Quality of seatsConcerts: Bundling, backstage passesOnline sales (attempts, e.g., Amazon)
50 Dynamic pricing might also work for commodities priced on the internet. Time of PurchaseAnother 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.
51 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.
60 Direct Market Segmentation Different prices to different buyersDirect Market Segmentation by ElasticitySenior citizen discounts at moviesBusiness vs. coach class air faresMen’s and women’s shirts at dry cleaners
61 Third Degree Price Discrimination Direct market segmentationIdentify segments, higher margins where demand is less elasticPrice per ticket Price per ticketOthersSeniors, KidsDemandMCMCDemandMRMRTicketsTickets
62 Third Degree Price Discrimination P,MCInelastic Market SegmentElastic Market SegmentPHIGHPLOW
63 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) = 96Two Prices:PL=5, Revenue=50PH=11, Revenue=242Total Revenue=292 Profit = (32) = 132
64 Two Segment MarketWhy do the elasticities differ? How can North Holland prevent arbitrage?
68 Indirect Market Segmentation Two price strategy by The ProducersDifferentiation by product attributesLess precise than directSpecial seats (experiment) in Manhattan moviesApplicationsVersionsBooks: Hardcover vs. paperbackConcert seatsTickets to all sorts of entertainment eventsTicket Pricing by “Value” (Examples below)
70 Pricing the Mac What was going on here? Black Mac $1499 White Mac $1349What was going on here?“How Much Is That Laptop? It Depends on the Color of the Case. And That's Fair.” Robert H. Frank. Economic Scene, New York Times, July 6, 2006.
71 Real Differences Not Proportional to Marginal Cost $300 for 2GB of memory and 90GB on the hard drive. Marginal cost near zero.
79 The Producers Price Index Price discrimination based on two attributes, seat location and day/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,
86 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,Frequency of price discrimination for acts with > 300 concerts.Discrimination defined as more than a single ticket price, e.g., floor vs. bleacher.
91 International Pirated Edition: Very Low Price! Renmin University of ChinaAll 827 pages
92 CannibalizationTwo level pricing system – the lower level may cannibalize the higher oneIf 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.StrategiesCareful setting of the difference between high and low pricesWhen segmenting by attributes, ensure that the attributes create real perceptible differences that consumers will value.
93 Lion King, Orpheum, SF Segmentation by Attributes
99 THE Bundling Application Block booking by the movie studiosForced rental of sets of moviesBlockbusters were bundled with dogsTHE PARAMOUNT CASE (1948)Broke up vertical arrangements (studios owning theaters)Disallowed block booking
100 Entertainment and Media: Markets and Economics End Class 1 – Part 3