Sunday, June 19, 2011

Museum Bundling

Stockholm's Moderna Museet (modern art museum) and the Arkitekturmuseet (architecture museum) share a building and, therefore, share a pricing plan. The first cost 100 krona and the second cost 60 krona, but the combination cost 140 krona.

I suspect most modern art fans are less enthusiastic about architecture and most architecture aficionados are less interested in modern art. For both groups, the profit-maximizing price for their first choice is greater than the profit-maximizing price for their second choice (adjusting for the apparent preference for modern art). That is, you would like to price discriminate between consumers' first choices and their second choices. But people rarely tell you which one they came for. With bundle pricing, they don't have to. So long as you are willing to take the same discount for both (20 krona in this case), they will self-select into the appropriate ticket purchase.

Mathematically, the increased sales from reducing the price on the second ticket has to more than make up for the lower margin. But this would be true since demand is usually more elastic for the second choice.

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