microeconomic

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in the neWS

?-,{ru *n# #f&*r" .Sr**m;*s Economist Hal Varian discusses a dramatic example oJ price discrimination.

The Dynamics of Pricing Tickets for Broadway Shows Bv H* R. Vnnralt

f very night in New York, about 25,000 Lpeople, on average, attend Broadr,vay shows.

As avid theatergcers know, ticket prices

have heen rising inexorably. The top ticket price for Broadway shows has risen 3l percent since 1 998. 8ut the actual price paid

has gone uo by only 24 percent.

Bcrgain hunters

The difference is a result of discounting.

Sawy fans know that there are deais avail- able for even the rnost popular shovrs, with the most popular discounts being offered

through coupons, two-for-one deals. speciei prices for students, and through the TKTS booth in Times Square.

Why so much discounting? The value ci a seat in a theater, like a seat on an airplane,

is highly perishable. Once the sholv starts c: the piane takes of{ a seat is worth next t0 nothing.

ln both inCustries, sellers use a variet; of strategies to try to ensure that the seats are solcj to those who are willing to pay the most.

This phenomenon was examined recentiy

by a Stanford econornist, Phillip Leslie, in ar artiele, "Price Discrimination in Broadwa';

lleater." published in the auturnn 2004 rsue of the ftANA hurnal af Econonics,

Mr. Leslie was able to collect detailed data

:: a 1996 BroaCway play, "Seven Guitars." lrer 140.000 people saw this play, and they ::ught tickets in 17 price catq0ries. Some ;",ce variation was due to the quaiity of ihe

.;ats-orchestra, mezzanine, balcony and

.: *n-while oiher price differences were a '::';it of various forms o{ discounting.

',ne combination of quality variation and

: !:siinis led to widely varying ticket pricer *-:

average difference of two tickets chosen

:: ,andom on a given night was about 40 :*r;€nt of tha average price. lhis is ccmpa- 'l: e :o the price variation in airline tickets. . . .

l"e tickel promoiicns also varied over '- * : 99 selfcr!'nances of the shorv. Targeted - ":- re;, *es :.:sed eally on, rryhile twojor- .r -i f.iri*Is r';€'3 .Bi rnr:cciuced until about ,.;. -. "i"^

--: : :.::: :ti'i: t:'.:': :: :'P t(tS

But the discounted tickets at TKTS tend to

be the lo,a,er-quality orchestra seats. They

sell at a {ixed discount of 50 percent, but are

offered only for performances that day.

Mr. Leslie's goal was primariiy 1o modei

the behavior of the theatergoer. The audi-

ence for Broadway shows is highly diverse.

About 10 p€rcent, according to a l99l sut- vey conducted by Sroadway prcducers, had

household incomes of $25,000 or $35,000

while an equal number had incomes over

5 I 50,000 {in 1990 dollars}.

The prices and discounling poliq set by

the producers of Broadway shot4rs try to use

this heterogeneity to get people to sort them'

selves hy their willingness to pay for tickets.

You pmbably will not see Donald Trump

waiting in line at TKTS; presumably, those

in his income class do not mind paying full

price. 8ut a lot of stildents, unernployed actors and tourists do use TKTS.

Y€s. it i5 inionr,enient to wait in line *: :iiiS. 3':-: ::;1 ;r :he asint. lf it weien't - --' .' :-- : i'. - -r .' ^ 1 -: : a-J l.;:

would result in substantially lower revenues

for Broadway shows.

Mr. Leslie uses some advanced econo-

metric techniques to estimate the values that different income groups put on the various categories of tickets. He finds that

Eroadway producers do a pretty good job,

in general, at maximizing revefiile. . . .

We are likely to see more and more goods and services sold using the same soil

o{ di{ferential pricing. As more and more

transactions become computer-mediated, it becomes easier for sellers to coliect data, to

experiment with pricing and to analyze the

results of those experirnents.

This, of course, makes lfe rnore complicated

for us consumen. Ihe flip sid€ is that pdcing

vailatisns make those god deais more likely. Last time I was in New York, I was

pleased that I managed to get a ticket to "The Producers" for half price. lt almost made up for the fact that I had t0 book my

airline ticket t,vo rryeeks in advance and stay

over a Saturday nighl.