Download TOWSE PAGINATION (M2613).indd

49 Pricing the arts
Michael Rushton
This survey presents general rules for arts organizations setting menus of prices for
live performances, museum exhibitions, festivals and the like. The problem facing arts
organizations is how to set prices to capture as much of the surplus generated by the
events as possible. In practice, this means finding a way to offer lower prices to ‘marginal
customers’ – those customers highly sensitive to price – while still collecting a higher
price from the average customer, who has a relatively inelastic demand for the events.
These practices are commonly known as ‘price discrimination’. Firms selling goods in
perfectly competitive markets must take prices as given, and so price discrimination
cannot be used, but such situations are rare in the arts, as each performance, exhibition
or festival has some unique characteristics.
Price discrimination can be achieved in two ways. One method is to charge different prices to different groups of customers, where it is easy for the arts organization to
identify the group to which each customer belongs. This is known as direct price discrimination, or third-degree price discrimination. A common example is a performance
or museum that gives a discount on the ticket price to students or to individuals above a
certain age. This practice can be effective only where there is no arbitrage; students must
not be able to purchase cheap tickets and resell them to those ineligible for the discount.
Consider for example an arts organization selling tickets for general admission to an
event, and that seeks to maximize profits (non-profit firms are dealt with below). Suppose
marginal cost is constant at MC, and, for now, that there is no capacity constraint; in this
situation MC is nearly zero. There are two groups of consumers. Let MRi and qi be the
marginal revenue curves and the quantity of tickets purchased by group i = L, H, where
L is the price-sensitive group, and the H group has low elasticity of demand.
The first rule-of-thumb is that the organization will maximize profits by setting prices
Pi such that MRi = MC for each group. The intuition is clear: if for either group MRi
> MC, profits can be increased by lowering the price for that group to sell a few more
tickets, and if MRi < MC, profits can be increased by raising the price for that group and
selling fewer tickets to them. It is as if the organization is selling two entirely unrelated
products.
Now suppose there is in fact a capacity constraint – there are only Q seats in the venue
– such that setting prices according to the MRi = MC rule would entail excess demand.
The second rule-of-thumb is that prices Pi should be set such that (1) MRL = MRH, and
(2) qL + qH = Q. The intuition is that if we were satisfying condition (2), but MRi > MRj,
it would increase profits to lower Pi (and sell to group i a few more tickets) and raise
Pj (and sell fewer tickets to group j); what is gained in increased revenue from group i
exceeds the loss in revenue from group j.
The second method of price discrimination is called ‘indirect’ or ‘second-degree’, and
involves offering to all potential customers a menu of prices for different packages of
tickets and complementary goods, and allowing customers to effectively sort themselves
350
Ruth Towse - 9781848448872
Downloaded from Elgar Online at 11/16/2015 07:01:21AM
via Universita Degli Studi Roma Tre
TOWSE PAGINATION (M2613).indd 350
19/05/2011 16:33
Pricing the arts 351
according to the options they choose. An example is a museum that charges one price for
general admission and an additional price for a special exhibit, which customers may or
may not choose to see. There are a number of applications.
Two-part pricing
Suppose the organization can charge a general admission price T, and a price P for
additional goods that are available once inside, where these additional goods are supplied with a constant marginal cost, MC (suppose there is zero marginal cost associated
with general admission). There are many examples in the arts: a museum might have an
additional fee for a special exhibit; there might be refreshments or souvenirs available
for sale inside a museum or performing arts venue or film theatre; a company might sell
hardware for reading digital books or listening to downloaded music recordings, as well
as the actual literary or musical content; or, to use the example from the seminal paper in
the subject (Oi, 1971), an amusement park may charge an entry fee and a price for each
ride.
To get started, imagine a simple case where consumers may differ in their willingness
to pay for general admission, but there is no discernible way to classify consumers in
terms of their demand for ‘rides’ (to proceed with the amusement park example). Then
the profit-maximizing strategy is (1) set P = MC, and (2) set T such that MR = 0. In other
words, set T to maximize the revenues from general admission, noting that MR and the
willingness to pay for general admission is dependent upon P – the higher is the price
per ride P, the lower is the willingness to pay for general admission. The intuition is that
setting P > MC is inefficient – at the margin there will be some consumers declining to
purchase more rides, because of the price, even though their willingness to pay for rides
at the margin exceeds MC. If the organization were to lower P, that creates more consumer surplus, which can be extracted by the organization in its subsequent ability to set
a higher general admission price T.
This model is amenable to direct price discrimination; the organization might want to
set a lower T for students or seniors, following the rule of setting T such that MRi = 0
for each group i. But it would remain the case that all groups would be charged the same
price P per ride.
But now suppose a situation where consumer preferences for ‘rides’ differ between
customers, but we have no way of knowing, as we do with direct price discrimination,
whether any specific individual is a great fan of rides or quickly tires of them.
In such a situation we should depart from P = MC in the following way: if our marginal, price-sensitive customer has a strong (relative to others) preference for ‘rides’, then
set P < MC, and capture the associated increase in consumer surplus by increasing T;
and if the marginal customer has a low (relative to others) preference for rides, then set
P > MC, which will necessitate a lower T.
The intuition is as follows. Suppose the first case, where the price-sensitive visitors have
a high preference for rides. Then offering subsidized rides is a way to bring them into the
venue. The organization won’t need to worry about losing too much of the custom of
average customers, since they value general admission highly but have a low demand for
rides in any case. When we observe an amusement park offering a high general admission
fee but free rides, even though the marginal cost per ride is positive, it is probably the
case that marginal consumers have a high preference for lots of rides. Offering rides for
Ruth Towse - 9781848448872
Downloaded from Elgar Online at 11/16/2015 07:01:21AM
via Universita Degli Studi Roma Tre
TOWSE PAGINATION (M2613).indd 351
19/05/2011 16:33
352
A handbook of cultural economics
free is not all that costly to the firm, since it is only the marginal consumers who will take
advantage of the free rides from opening until closing.
Now consider the opposite case, where the typical customer has a greater demand
for rides than the marginal customer. Then the organization can entice the marginal
consumer into the venue with a low entry fee T, and capture the high surplus of the
average customer through charging them for the rides they so enjoy. This provides an
explanation of the phenomenon so often remarked upon by laypersons: ‘Why is popcorn
so expensive in movie theatres?’ It turns out that marginal, infrequent attendees of the
cinema buy less popcorn than those who attend more often. So it makes sense for the
theatre owner to lower the price of admission into the theatre, and earn high profits on
popcorn sales (Gil and Hartmann, 2009).
Bundling
Suppose there is some good X, not necessarily an arts-related good, for which there is
some demand by price-sensitive, marginal consumers of the arts, but for which there
is little interest from the average ticket-buyer for the arts. Then the arts organization
might effectively price-discriminate by offering to all ticket-buyers a special discount on
good X. This will help lure marginal consumers to the arts venue, but without having to
provide any sort of discount in price to the average price-inelastic attendees, who will
not be interested in exercising their rights to buy X at a subsidized price. This practice is
known as ‘bundling’. As an example, consider a theatre in London’s West End. It might
charge high ticket prices, knowing that average theatre-attendees will pay the high price,
and offer a ‘bundle’ of a pair of theatre tickets, a pair of tickets on a sightseeing bus, and
dinner at a good, but not excellent, restaurant, where the price for the bundle is significantly less (although still above cost) than the price of buying all three goods separately.
Here, the marginal customers are tourists, probably on a tight budget, and with many
different things on offer in the city to compete for their limited time. They might not be
willing to pay full price for theatre tickets, but will find the bundle an attractive option.
And the theatre is able to attract their business without lowering the price for ordinary,
unbundled tickets that would be purchased by London residents.
Differential quality
Arts organizations can charge different prices for customer experiences of different
characteristics and quality. For example, preferred seats, or preferred times of performances can command a higher price than lower-quality seats or tickets for performances
at low-demand times of day or days of the week. Publishers offer different versions of
books: hardcovers have the advantage of more durable binding and being immediately
available, while paperbacks have the disadvantages of less durable binding and a delay
(usually at least a year) in release. Seats in the upper balcony, and paperback versions
of novels, are priced to attract marginal, price-sensitive consumers, while seats in the
orchestra, and immediately available hardcover books, are priced higher, with the
knowledge that some consumers will be willing to pay the higher price in order to obtain
the highest quality.
The challenge for the arts organization is to ensure that the quality difference is high
enough relative to the price differential to avoid having too many consumers opting for
the lower-quality/lower-priced alternative. Thus, while it makes sense to charge for the
Ruth Towse - 9781848448872
Downloaded from Elgar Online at 11/16/2015 07:01:21AM
via Universita Degli Studi Roma Tre
TOWSE PAGINATION (M2613).indd 352
19/05/2011 16:33
Pricing the arts 353
lower-quality version a price as close as possible to the marginal customer’s willingness to pay, in general the price of the high-quality version is something less than the
maximum willingness to pay by high-demand customers, in order to avoid their ‘switching’ to the lower-priced option. Cheung (1977) adds that high-quality seats might also be
‘underpriced’ to prevent them from going unsold and, subsequently, occupied by those
who bought lower-quality seats and then snuck past the ushers into the vacant highquality seats.
An interesting empirical study concerns tickets for Broadway theatre, and the halfprice day-of-show tickets that can be bought in person at selected outlets in New York.
The day-of-show tickets are lower ‘quality’ in the sense that there is great uncertainty as
to whether any will in fact be available on the day of the show, and also in the (deliberate)
inconvenience in obtaining them – they cannot be purchased online or by telephone even
though such purchases would be easy for theatres to accommodate, since regular tickets
can be bought that way. Leslie (2004) used data on sales to find that the theatres were
not engaged in profit-maximizing pricing, because the discount for day-of-show tickets
was too high – the high price differential combined with the relatively small difference in
‘quality’ was inducing too much ‘switching’ by high-demand customers into purchasing
the discounted tickets. Leslie suggests a discount on day-of-show tickets of about 30 per
cent would have been more profitable for the theatres. See also Courty (2003a, 2003b) on
the timing of price discounts.
Quantity discounts
It is commonplace for museums to offer single-day tickets or memberships for families
that cost less on a per-person basis than would be charged to a single individual, and this
is a fairly obvious recognition of the differential willingness to pay by a single individual
and set of two parents with children.
In addition, discounts are given on the number of events attended: festivals offer
menus of different numbers of performances to attend, where the cost per event is lower
the more events are purchased; performing arts organizations offer season tickets; and
museums offer memberships that lower the effective price per visit. For individuals,
diminishing marginal benefits work on two levels here. Consider an opera season, where
there are options for tickets to individual operas as well as season tickets. The more
operas one sees in a season, the lower the marginal benefit for attending one more. But
that reasoning applies equally to purchases of oranges or shirts. In addition, however, if
one were to purchase tickets for the opera on an individual basis, the person would first
choose a ticket to their favourite opera of the season. If they were to buy tickets for a
second opera during the season, the second ticket would be for an opera that is less preferred than the first one, and so the reservation price for that ticket will be less.
In general, it is best for the arts organization to ensure that there is a variety of ticketpurchase options, to best capture the surplus from individuals with different willingness to pay not only for a single ticket, but who experience differing rates of decline in
marginal benefits.
Pricing when profits are not the only goal
Suppose a museum or orchestra is run by the state or a non-profit. How would pricing
depart from the profit-maximizing rules given above?
Ruth Towse - 9781848448872
Downloaded from Elgar Online at 11/16/2015 07:01:21AM
via Universita Degli Studi Roma Tre
TOWSE PAGINATION (M2613).indd 353
19/05/2011 16:33
354
A handbook of cultural economics
It might be the case that prices do not change at all; the goals of outreach to underserved communities might best be reached by maximizing profits from museum admissions or concert tickets, and using the proceeds to fund educational programmes.
On the other hand, suppose the goal is simply to increase attendance at the museum
or concerts. First note that the means of price discrimination used by profit-maximizing
firms already work to the benefit of those with a lower willingness to pay, who can get
discounted admission on times and days of the week when demand is typically low,
and who can get ‘basic’ admission at a low rate without paying for special exhibits or
prime-location orchestra seats. But a state-owned or non-profit arts organization might
discount the basic offering even further to achieve their goals of broad dissemination of
the arts.
Would the discount in prices ever extend to charging a basic admission price below
marginal cost? We can imagine a few possibilities: the target customer of the deeply
discounted price has a willingness to pay above marginal cost, but this is a means of
transferring consumer surplus to that person; or, the target customer’s willingness to pay
is below marginal cost, but (1) there are positive externalities associated with consumption, or (2) consumption now will alter preferences and willingness to pay in the future. If
none of these factors is present, it is difficult to justify prices below marginal cost.
New directions in pricing
Arts organizations continue to experiment with new methods of price-setting, owing to
the possibilities created by technological change in online transactions and data management. For example, concert tickets can now be sold through online auctions (Halcoussis
and Mathews, 2007). And as sports franchises adopt methods of variable pricing through
their seasons, where prices adjust according to shifting demand for specific matches, we
might also begin to see the same for tickets for live performances in the arts.
See also:
Chapter 1: Application of welfare economics; Chapter 26: Demand; Chapter 37: Marketing the arts; Chapter
40: Museums; Chapter 47: Performing arts.
References
Adams, William James and Janet L. Yellen (1976), ‘Commodity Bundling and the Burden of Monopoly’,
Quarterly Journal of Economics, 90, 475–98.
Ansari, Asim, S. Siddarth and Charles B. Weinberg (1996), ‘Pricing a Bundle of Products or Services: The Case
of Nonprofits’, Journal of Marketing Research, 33, 86–93.
Cheung, Steven N.S. (1977), ‘Why are Better Seats “Underpriced”?’, Economic Inquiry, 15, 513–22.
Clerides, Sofronis K. (2002), ‘Book Value: Intertemporal Pricing and Quality Discrimination in the US Market
for Books’, International Journal of Industrial Organization, 20, 1385–408.
Connolly, Marie and Alan B. Kreuger (2006), ‘Rockonomics: The Economics of Popular Music’, in V.A.
Ginsburgh and D. Throsby (eds), Handbook of the Economics of Art and Culture, Amsterdam: NorthHolland, pp. 667–719.
Courty, Pascal (2000), ‘An Economic Guide to Ticket Pricing in the Entertainment Industry’, Recherches
Économiques de Louvain, 66, 167–92.
Courty, Pascal (2003a), ‘Ticket Pricing Under Demand Uncertainty’, Journal of Law and Economics, 46,
627–52.
Courty, Pascal (2003b), ‘Some Economics of Ticket Resale’, Journal of Economic Perspectives, 17, 85–97.
Courty, Pascal and Mario Pagliero (2009), ‘Price Discrimination in the Concert Industry’, CEPR Discussion
Paper No. 7143.
Cowell, Ben (2007), ‘Measuring the Impact of Free Admission’, Cultural Trends, 16, 203–24.
Ruth Towse - 9781848448872
Downloaded from Elgar Online at 11/16/2015 07:01:21AM
via Universita Degli Studi Roma Tre
TOWSE PAGINATION (M2613).indd 354
19/05/2011 16:33
Pricing the arts 355
Currim, Imran S., Charles B. Weinberg and Dick R. Wittink (1981), ‘Design of Subscription Programs for a
Performing Arts Series’, Journal of Consumer Research, 8, 67–75.
Gil, Ricard and Wesley R. Hartmann (2009), ‘Empirical Analysis of Metering Price Discrimination: Evidence
from Concession Sales at Movie Theatres’, Marketing Science, 28, 1046–62.
Halcoussis, Dennis and Timothy Mathews (2007), ‘eBay Auctions for Third Eye Blind Concert Tickets’,
Journal of Cultural Economics, 31, 65–78.
Leslie, Phillip (2004), ‘Price Discrimination in Broadway Theater’, Rand Journal of Economics, 35, 520–41.
Leslie, Phillip and Alan Sorenson (2009), ‘The Welfare Effects of Ticket Resale’, NBER Working Paper No.
15476.
Maddison, David and Terry Foster (2003), ‘Valuing Congestion Costs in the British Museum’, Oxford
Economic Papers, 55, 173–90.
Mortimer, Julie Holland (2007), ‘Price Discrimination, Copyright Law, and Technological Innovation:
Evidence from the Introduction of DVDs’, Quarterly Journal of Economics, 122, 1307–50.
Oi, Walter Y. (1971), ‘A Disneyland Dilemma: Two-part Tariffs for a Mickey Mouse Monopoly’, Quarterly
Journal of Economics, 85, 77–96.
Prieto-Rodríguez, Juan and Víctor Fernández-Blanco (2006), ‘Optimal Pricing and Grant Policies for
Museums’, Journal of Cultural Economics, 30, 169–81.
Ravanas, Philippe (2008), ‘Hitting a High Note: The Chicago Symphony Orchestra Reverses a Decade of
Decline with New Programs, New Services and New Prices’, International Journal of Arts Management, 10,
68–87.
Rentschler, Ruth, Anne-Marie Hede and Tabitha R. White (2007), ‘Museum Pricing: Challenges to Theory
Development and Practice’, International Journal of Nonprofit and Voluntary Sector Marketing, 12, 163–73.
Rosen, Sherwin and Andrew M. Rosenfield (1997), ‘Ticket Pricing’, Journal of Law and Economics, 40, 351–76.
Shiller, Ben and Joel Waldfogel (2009), ‘Music for a Song: An Empirical Look at Uniform Song Pricing and its
Alternatives’, NBER Working Paper No. 15390.
Shy, Oz (2008), How to Price, Cambridge, UK: Cambridge University Press.
Steinberg, Richard and Burton A. Weisbrod (1998), ‘Pricing and Rationing by Nonprofit Organizations with
Distributional Objectives’, in B. Weisbrod (ed.), To Profit or Not to Profit, Cambridge, UK: Cambridge
University Press, pp. 65–82.
Steinberg, Richard and Burton A. Weisbrod (2005), ‘Nonprofits with Distributional Objectives: Price
Discrimination and Corner Solutions’, Journal of Public Economics, 89, 2205–30.
Further reading
Shy (2008) is a comprehensive text on pricing, and Courty (2000) provides a survey of ticket pricing. On
differential levels of quality and price discrimination see Rosen and Rosenfield (1997) on tickets, Clerides
(2002) on books, and Mortimer (2007) on evidence from VHS and DVD versions of movies. On bundling and
subscriptions, see Adams and Yellen (1976), Ansari et al. (1996), Currim et al. (1981), and Ravanas (2008).
Connolly and Kreuger (2006) and Courty and Pagliero (2009) consider when popular music performers will use
price discrimination. On price discrimination methods for online music downloads, see Shiller and Waldfogel
(2009). Leslie and Sorenson (2009) consider pricing strategies when there are secondary markets in tickets.
On museum pricing see Cowell (2007), Prieto-Rodríguez and Fernández-Blanco (2006) and Rentschler et al.
(2007). Maddison and Foster (2003) examine optimal museum pricing when consumers are willing to pay to
reduce crowding. On departures from profit-maximizing pricing when there are distributional objectives, see
Steinberg and Weisbrod (1998, 2005).
Ruth Towse - 9781848448872
Downloaded from Elgar Online at 11/16/2015 07:01:21AM
via Universita Degli Studi Roma Tre
TOWSE PAGINATION (M2613).indd 355
19/05/2011 16:33