Friday, June 19, 2009

Dynamic pricing in the secondary concert ticket market

Our awesome MIT Sloan pricing professor Catherine Tucker sent us a link about how Ticketmaster/Live Nation is looking at doing more dynamic pricing. It reminded me to post this mini-paper that Andreas Ruggie, Anju Mathew and myself put together.


Dynamic Pricing in the Secondary Ticket Market
By Ted Chan, Anju Mathew and Andreas Ruggie
MIT Sloan School of Management

Introduction

We focus this paper on what we felt was the little understood current world of price trends in the secondary concert ticket market. Since we are all avid music fans in our own lives, we naturally gravitated towards popular music concerts as the chosen medium for our case study.

In capacity-constrained markets, we generally find ticket prices increasing closer to the date of service. A familiar example is air travel. We’ve all seen the price on delta.com suddenly skyrocket to $800 per ticket from Boston to Salt Lake City, simply because it’s the night before the flight and you and your long-distance girlfriend just decided you REALLY need to see each other tomorrow (ahem – frequent personal experience of one of the team members). The reasoning generally provided for this unfortunate phenomenon is market segmentation. While it’s questionable whether or not this trend actually encourages the remaining seats to be sold, however, that is an examination for another day. Here, we were interested in exploring whether or not the secondary concert ticket market follows similar consumer-unfriendly trends (or different consumer-unfriendly trends, as it were...). Ultimately, we sought to determine through our study whether the current practices of concert promoters and ticket vendors are appropriate or not, whether they are based on accurate assumptions about consumer behavior, whether there is any money being left on the table, and finally whether or not anything should be systematically changed.

Methodology

To gather relevant data for our investigation, as case studies we chose to focus on three different recent concerts targeting three different audience demographics at three different types of venues, to see if any similarities arose in terms of price trends. We decided that if we followed the price fluctuations over time leading up to each concert, we could determine 1) if a dynamic pricing model exists, or 2) what an optimal dynamic pricing model should ultimately look like.

The concerts that we felt covered a wide enough user base were the Dave Matthews Band at the Journal Pavilion amphitheatre in Albuquerque, NM on May 5th (what we refer to as “mass market and stoned” at a mid-sized venue), Pete Seeger’s 90th birthday celebration show at Madison Square Garden on May 3rd (“old and used to be stoned” at a large venue), and The Killers’ May 5th performance at the Columbus Lifestyle Arena in Columbus, Ohio (“hip n’ happening” at small venue). Scraping data off of eBay from completed auctions of ticket transactions for these shows, we consolidated our data into the categories of face value, sale price, number of tickets, seating, and days until the concert. We mapped price changes over time.
Findings

Below is a sample of the data we compiled:



As the data for The Killers show indicates, and the data for Pete Seeger and Dave Matthews Band reinforces more extremely, the prices of tickets in the secondary market tends to decrease quite significantly in the days leading up to the actual show. This might seem surprising to some (and indeed opposite to the airline industry), given the horror stories we all hear about mothers not being able to buy Jonas Brothers tickets for their children due to extreme scarcity and exorbitant, escalating costs. We believe that this will only be the case for the few truly high demand concerts.

Thanks to a little research paper the team happened to read about Major League Baseball, however, this trend was exactly what The Price Is Right expected to find.

Major League Baseball

Andrew Sweeting’s paper on “Equilibrium Price Dynamics in Perhishable Goods in Secondary Markets for MLB Tickets” explains why ticket prices tend to decline by economically significant amounts – 25% or more, as the time gets closer to the game. Sweeting’s research supports dynamic pricing models where prices are adjusted over time, especially those where an initial offer price is higher further out and then the tickets are offered at lower prices as the date approaches. This is the case because there are actually buyers who have a higher willingness to pay earlier in the ticket sales process (Sweeting argues this is due to search costs and the risk of the lack of future availability).

Sweeting argues that declining prices can only be the equilibrium outcome if people are willing to purchase early when expected prices are relatively high. Consumers should be able to time their purchases. To support his hypotheses, he looked at two markets. One was StubHub, which has only posted prices, not transaction prices, and “Market 2” which sounded a heck of a lot like eBay to us.

Two arguments for falling seller demand are:

1) Falling Opportunity Cost and Time-Varying Demand/Revenue Elasticities. To keep it simple, this can be summed up as meaning as the ticket date approaches, the chances of making a big kill and finding a high WTP buyer are lower. If tickets are not sold by the end, they are worth nothing.

2) Learning by Sellers – All customers have the same reservation value for the item, about which the seller has prior beliefs. Typical pricing strategy starts high, and if they are not sold, then seller cuts price in 2nd period. If the WTP was higher, they’d all buy and all the tickets would have already sold!

So why do people purchase early if prices will fall? Two reasons: the first is uncertain future availability. A prospective buyer is worried that if they don’t buy now, they will lose out. The second reason is search costs. It costs the consumer time (and time = money) to sit around trying to win an auction to save some money, or they have to log in again later to get tickets.

Implications and Conclusion

We believe these insights can be applied directly to the live music industry to explain our findings; scarcity in this case may in fact be a fabrication, and concert promoters may not actually be as stupid as people think. The question becomes what the implications are for the participants in the value chain.

As far as concert-goers are concerned, patience really is a virtue. It may be the case that the above data, if publicized, could potentially re-shape consumer behavior, as fans would simply know to wait until the last minute to buy their tickets, even for concert by their favorite artist.
On the other hand, concert promoters and secondary ticket vendors seem to have figured out the psychology of their consumers quite adeptly. For the time being, we recommend that they continue to emphasize urgency and lack of availability using whatever “scare tactics” are at their disposal. If we had additional time for a follow-up study, it would be worthwhile to somehow determine whether or not an upwards adjustment to prices late in the game would cannibalize upfront sales and destabilize the equilibrium that concert promoters and ticket vendors seem to have created. But for now, we’re late for a show…

1 comment:

Monty said...

I share the same views. Liked your blog very much.