Steve Cannon, CEO of the AMB Group, Blank's holding company, told ESPN that although food and beverage prices were 50 percent lower in its new Mercedes-Benz Stadium than the prices in the Georgia Dome the previous year, fans spent 16 percent more.
As a first approximation,
(% Change in Revenue) = (% Change in Price) + (Change in Quantity)
In this case, 16% = -(50%) + X, or X = 66%. In words, revenue increased because the 50% drop in price was more than offset by the increase in quantity because food demand was much more elastic than the Falcons previously thought--otherwise they would have lowered prices last year.
To maximize profit on food sales, set MR=MC which implies (Price-MC)/P=1/|elasticity|. In this case, with an estimated elasticity of -1.32=66/(-50), the optimal margin on food is 76%.
To maximize profit on food sales, set MR=MC which implies (Price-MC)/P=1/|elasticity|. In this case, with an estimated elasticity of -1.32=66/(-50), the optimal margin on food is 76%.
HT: Justin
Great post. I love how you always draw out the math behind the interesting tid bits of the current commercial world.
ReplyDeleteOne edit I would make is to add the negative sign to the estimated elasticity equation:
-1.32=66/(-50)
thx, made the correction!
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