Thursday, November 1, 2018

Taylor Swift does Revenue Management

When you price to fill a venue with a fixed capacity, there are two mistakes you can make:

  • Type I error: You can price too low, and have excess demand
  • Type II error:  You can price too high, and have empty seats

An optimal strategy would choose a price that sets expected demand to capacity, but "shaded" high or low, depending on the relative size expected costs of over and under pricing.  In other words, if the expected costs of under pricing are bigger than the expected costs of over pricing, then price a little higher than the target price where capacity equals expected demand.

Reducing uncertainty, means that you can more accurately price to match demand to capacity (you shade less).  Some middling economists have written on how hotel mergers reduce uncertainty, and allow the merged hotel to price more accurately.  With fewer over pricing errors, occupancy goes up. 
Kalnins, Arturs and Froeb, Luke M. and Tschantz, Steven T., Mergers Increase Output When Firms Compete by Managing Revenue. Vanderbilt Law and Economics Research Paper No. 10-27. Available at SSRN: or

If you went on Ticketmaster in January and pulled up a third-row seat for Taylor Swift‘s June 2nd show at Chicago’s Soldier Field, it would have cost you $995. But if you looked up the same seat three months later, the price would have been $595. That’s because Swift has adopted “dynamic pricing,” where concert tickets – like airline seats – shift prices constantly in adjusting to market demand. It’s a move intended to squeeze out the secondary-ticket market – but it’s also left many fans confused as they’re asked to pay hundreds of dollars more than face value. “Basically, Ticketmaster is operating as StubHub,” says one concert-business source.
The problem, of course, is that by dynamic pricing, concert goers have an incentive to "game" the dynamic pricing, by waiting until the last minute to book seats.  

1 comment:

  1. Here's another example I found of sports/entertainment companies using additional information about ticket prices on secondary markets, like StubHub, to more accurately price the tickets in the first place.