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Entertainment and Media: Markets and Economics

Price Discrimination

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Pricing and Value from the Consumer’s ViewpointMarket prices and willingness to pay

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Perfect Price Discrimination First degree discrimination Every consumer pays their reservation price The seller extracts all surplus value Profit is maximized absolutely; This hypothetical situation is the best

the seller could possibly do.

Price

Quantity

Demand

Marginal Cost

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Attempt to apply first degree price discrimination

Yield Management: A form of price discrimination Fixed, perishable product Low (or zero) marginal cost Segmentable markets

Applications Airlines: Timing of sales; fare classes Hotels: Timing of sales, length of stay Car Rental: Insurance and damage waivers, upgrades Sports: Quality of seats for dozens of configurations Concerts: Bundling, backstage passes Online sales (attempts, e.g., Amazon)

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A General Rule for Price Discrimination(Strategic Pricing)

Extract consumer surplus where there are opportunities Greater profit extracted from the less elastic buyer Rule: (Price – Marginal Cost)/Price = price cost (profit) margin = 1 / |Price Elasticity| Generally means higher prices charged to less elastic

demanders

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Market Segmentation

Different prices to different buyers of the same commodity Making it work

There must be real segments The segments must be kept apart – no sales across segments

Examples of market segmentation by elasticity Senior citizen discounts at movies Men’s and women’s shirts at dry cleaners

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Third Degree Price Discrimination:Monopoly pricing in each segment

Inelastic Market Segment:Movies;General Admission

Elastic Market Segment: Movies; Kids, Seniors

P,MC

PHIGH

PLOW

Tickets

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Market SegmentationFor every single price regime, there is a two price regime that is more profitable. (Assuming market segments exist.)

Separable Markets; AssumeMC = 5.

One Price = 8,Revenue = 8(4)+8(28)=256Profit = 256-5(32) = 96

Two Prices:PL=5, Revenue=50PH=11, Revenue=242Total Revenue=292Profit = 292-5(32) = 132

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Two Segment Market

Why do the elasticities differ?How can North Holland prevent arbitrage?

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Two Price Regime at Amazon Prime

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Magic Pricing Kingdom

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Dynamic Pricing

Elements of pricing by attributes. Attributes change over time and elasticities change when they do.

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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.

http://spinnakr.com/blog/ideas/2013/08/variable-pricing-models-work-for-tech-startups/

Dynamic pricing might also work for commodities priced on the internet.

Pure dynamic pricing: Elasticity varies by time (over day, week, season).

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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.

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Second Degree Price Discrimination

Quantity discounts Smaller purchaser generally has the less elastic

demand. Applications:

Groceries Multiple site theme parks (Disney)

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Quantity Discounts at Disney WorldNumber of Parks

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Quantity Discounts at Disney WorldNumber of Days

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Market Segmentation by Attributes

Differentiation by product attributes Key element: Price difference exceeds marginal cost

difference Less precise than direct segmentation by identifiable

characteristics of buyers Applications

Special seats in Manhattan movies Versions of software Books: Hardcover vs. paperback Concert seats Tickets to all sorts of entertainment events Ticket Pricing by “Value”

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Price Discrimination in Concerts. About 5% impact on gross revenues

Discrimination defined as more than a single ticket price, e.g., floor vs. bleacher.

Frequency of price discrimination for acts with > 300 concerts.

The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry, P.Courty and M. Pagliero, Review of Economics and Statistics, 94, 2012, 359-369.

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Black Mac $1499

White Mac $1349

What was going on here?

Real Differences in Aesthetics Not Proportional to Marginal Cost

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$85 includes license fee for Yankees lid. The license fee is less than $85/computer.

$0 for black. $40 for Pink, Red, Blue, Green, Purple. The marginal cost of the different colors is close to zero. Notice the marketing; not Green, “Jade Green.”

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High FlyingPrice

Discrimination

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Real Functional Differences Not Proportional to Marginal Cost

$300 for 2GB of memory and 90GB on the hard drive. Marginal cost near zero.

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“Business Class” for movie goers

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More Price Discrimination

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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, http://www.stanford.edu/~pleslie/broadway.pdf

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1. Place of the seat relative to the stage. 2. Programming3. Time and date of the show4. Time of purchase

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2003 Mets Price Experiment

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Yankee Stadium Pricing

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Pricing Downloads

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Hard Cover US v UK Version; 9/13/07

₤50.34 = $102.30

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International Pirated Edition: Very Low Price!

Renmin University of China

All 827 pages

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Cannibalization

Two level pricing system – the lower level may cannibalize the higher one If 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. Strategies

Careful setting of the difference between high and low prices When segmenting by attributes, ensure that the attributes

create real perceptible differences that consumers will value.

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Lion King, Orpheum, SFSegmentation by Attributes

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Bundling

Applications Cable TV

Basic Basic+Premium+Music Choice

Econometric Analysis 6th ed. with answers What is the strategy? (Not specific to experience goods:

Phone services Car features

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Time Warner Cable Bundles

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THE Bundling Application

Block booking by the movie studios Forced rental of sets of movies Blockbusters were bundled with dogs

THE PARAMOUNT CASE (1948) Broke up vertical arrangements (studios

owning theaters) Disallowed block booking