11/09/2017

ALL IS FAIR IN DYNAMIC PRICING—OR IS IT?

Dominic Barbaro, Senior Insights Analyst

A client shared Neil Irwin’s New York Times piece with me about how dynamic pricing is perceived across different industries—he said I would love it given our work managing inventory for the current/recent Broadway musicals Come From Away, The Band’s Visit, Once On This Island, and Rocktopia. Boy, was he right.

The article opens with an analysis of Bruce Springsteen’s current Broadway engagement, which is priced below what the market will bear based on the current resale prices on sites like StubHub. Ticket prices on Ticketmaster ranged between $75 and $850 for tickets, which were allocated through a random lottery that uses identity verification. This technology is offered through Ticketmaster’s “Verified Fan” program, which is also utilized by Hamilton and Harry Potter and the Cursed Child. With Springsteen tickets on StubHub for up to $13,000 EACH, on the surface it looks as if Mr. Springsteen left a great deal of money on the table with this initial pricing.

Well, here’s the counter-argument to Supply and Demand 101: Just because he could charge $13,000 per ticket doesn’t mean he should charge $13,000 per ticket. Making this point in the Times article, University of Chicago economist Richard H. Thaler said, “A good rule of thumb is we shouldn’t impose a set of rules that will create moral outrage, even if that moral outrage seems stupid to economists.” Underpricing of popular concerts and Broadway shows is nothing new—there’s limited seating and seemingly limitless demand. The Springsteen approach might be “economically irrational,” but it’s not just about money—it’s about creating a long-term relationship with fans.

And, it’s an issue of fairness. Fans don’t want to think their favorite show or artist is gouging them, and it’s often in the best interest of Broadway shows to make it affordable for fans to be ambassadors—or even return multiple times. Many Broadway shows offer affordable entry prices for this reason, and then use top-price inventory and premium tickets to gross above potential.

We don’t want to make people angry when prices for tickets are increased. For example, Uber has responded to scrutiny over surge pricing by quoting fares up front and turning off surge pricing during disasters—like the recent earthquake in Mexico City. The electricity industry has explored surcharges for service on hot summer days, but the effect of higher utility prices is disproportionately more onerous for the poor than for the rich.

So what is the takeaway for live entertainment? If you have a hit show, yes, you can—and should—charge more for your top tickets. But you shouldn’t make every seat in the theatre cost hundreds of dollars. Ensuring accessibly-priced tickets are available for fans isn’t economically irrational—in the long run for your brand, it’s good business.