Monday, January 04, 2010

The Price of Sport

I can't help but wonder about the economic rationale of sports administrators and how they set the admission price to a sports event. An article today claims ticket prices for cricket have gone up by 88% since 2001-02, which is claimed is twice the rate of inflation (I'd think it is possibly more than that).

How should a sport set the price for admission. You'd think that the profit maximising price was the one that filled every seat, but that is not necessarily the case. It depends on what is the price the last person is prepared to pay for their seat. In fact, standard monopoly analysis would tell you that the profit maximising point is probably (depending on the exact shape of the demand curve) at some point less than this. The correct answer also depends on the balance between the fixed costs for use of the stadium versus the variable costs.

Given that stadium owners also have their own challenge in designing their pricing schedule, the issue could be as much about ow they design their prices. They do typically charge a two part price of a fixed fee and then a variable fee. Sometimes the latter is based on a share of revenue which also becomes problematic.

There are, however, two other factors that mean the simple monopoly analysis doesn't apply. The first is that not all seats are the same, and that each person is sold a specific seat. That means it is possible to run a version of either first degree price discrimination or third degree price discrimination. These are fancy terms for charging each customer by their willingness to pay and differentiating the product respectively. The first happens to a degree when ou bargain on the price at a market or buying a car, the second is the practice of selling very similar products under three brand names.

For sports events the existence of different seat categories is a version of third degree price discrimination. The real question is whether this strategy is being properly employed. A quick survey of most venues shows that the vast bulk of tickets are sold at the highest price, with a lesser number at usually no more than two cheaper prices based on the idea that these are inferior seats. This strategy usually reflcts the stadium's policy, not the hirer's, and reflects the stadium's desire to believe that there is almost) "no such thing as a bad seat". This becomes quite ridiculous at times. For test cricket anything within 10 degrees of the wicket is far superior to something further around, though there is a small number of people who favour direct square on.

But ticket prices as offered are the same over the whole bloody bowl just based on elevation and cover. A profit maximising strategy would chage more for the good tickets and less for those that aren't.

It is even possible to pursue a first degree price discrimination strategy, by the use of auctions. With the modern process of online ticket sales it is not too hrd to build a system that would auction off the most desirable seats. This maximises total revenue.

The second factor is the importance of maximising return from all sources over time. Watching sport on television being played in an empty stadium is no fun at all. The crowd at the game is important to its enjoyment on television. Also, most sports are better understood once you have watched them live. Failure to draw a live audience detracts from the future revenue potential for the sport.

The same is true for venue operators. They need to structure their prices to create a incentive for the hirer to fill the stadium. That is a problem because a high fixed fee does that, but then becomes a disincentive for marginal events to hire the stadium. However, as hirers tend to use venues for a series of events rather than one by one, it is possible to design appropriate case-by-case pricing structures.

If anyone knows of any published studies on pricing for sports venues I'd love to know.

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