Entertainment and Media Markets and Economics Price Discrimination

Entertainment and Media: Markets and Economics Price Discrimination 1: G - 1(57) Price Discrimination

Pricing and Value from the Consumer’s Viewpoint Market prices and willingness to pay 1: G - 2(57) Price Discrimination

Perfect Price Discrimination Ø Ø First degree discrimination Every consumer pays their reservation price The seller extracts all surplus value Profit is maximized absolutely; This hypothetical situation is the best the seller could possibly do. Price Marginal Cost Demand Quantity 1: G - 3(57) Price Discrimination

Attempt to apply first degree price discrimination p Yield Management: A form of price discrimination n p Fixed, perishable product Low (or zero) marginal cost Segmentable markets Applications n n n Airlines: Timing of sales; fare classes Hotels: Timing of sales, length of stay Car Rental: Insurance and damage waivers, upgrades Sports: Quality of seats for dozens of configurations Concerts: Bundling, backstage passes Online sales (attempts, e. g. , Amazon) 1: G - 4(57) Price Discrimination

A General Rule for Price Discrimination (Strategic Pricing) Ø Ø Ø Extract consumer surplus where there are opportunities Greater profit extracted from the less elastic buyer Rule: (Price – Marginal Cost)/Price = price cost (profit) margin = 1 / |Price Elasticity| Generally means higher prices charged to less elastic demanders 1: G - 5(57) Price Discrimination

Market Segmentation Ø Ø Different prices to different buyers of the same commodity Making it work Ø Ø Ø There must be real segments The segments must be kept apart – no sales across segments Examples of market segmentation by elasticity Senior citizen discounts at movies Ø Men’s and women’s shirts at dry cleaners Ø 1: G - 6(57) Price Discrimination

Third Degree Price Discrimination: Monopoly pricing in each segment Inelastic Market Segment: Movies; General Admission P, MC Elastic Market Segment: Movies; Kids, Seniors PHIGH PLOW Tickets 1: G - 7(57) Price Discrimination

Market Segmentation For every single price regime, there is a two price regime that is more profitable. (Assuming market segments exist. ) Separable Markets; Assume MC = 5. One Price = 8, Revenue = 8(4)+8(28)=256 Profit = 256 -5(32) = 96 Two Prices: PL=5, Revenue=50 PH=11, Revenue=242 Total Revenue=292 Profit = 292 -5(32) = 132 1: G - 8(57) Price Discrimination

Two Segment Market Why do the elasticities differ? How can North Holland prevent arbitrage? 1: G - 9(57) Price Discrimination

Two Price Regime at Amazon Prime 1: G - 10(57) Price Discrimination

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Magic Pricing Kingdom 1: G - 12(57) Price Discrimination

Airlines do it. Hotels do it. Sport venues and concert halls do it. And, to the irritation of car-less urban travelers, so does Uber. Now the Walt Disney Co. is jumping on the bandwagon with demand-based pricing, too. The company announced that because "the demand for Disney Parks continues to grow, especially during peak periods, " seasonal pricing will now be applied to 1 -day tickets at both Disneyland in California and Walt Disney World in Florida. Disney says new ticket pricing, which has already gone into effect, is designed to "help spread out visitation, " but it means higher prices will be charged during the most popular periods (such as holidays and summer weekends) and lower prices during slow seasons, such as September, when kids go back to school. 1: G - 13(57) Price Discrimination

Dynamic Pricing Elements of pricing by attributes. Attributes change over time and elasticities change when they do. 1: G - 14(57) Price Discrimination

Pure dynamic pricing: Elasticity varies by time (over day, week, season). Dynamic pricing might also work for commodities priced on the internet. Time of Purchase Another tactic implemented by the airline industry is changing prices based on the time of day. They do this using analytics to determine the time of day at which most of their customers are purchasing tickets and charge higher prices at those times. This allows them to increase revenue and tailor their prices to the demand on the site. It is a little known secret that Amazon uses similar techniques and changes their prices multiple times a day to match the demand for an item. This type of variable pricing is harder to use than the other two because it requires constant monitoring to determine the appropriate price. Amazon and others have developed algorithms that do this for them and as these algorithms improve it is likely that more businesses will use time based pricing. http: //spinnakr. com/blog/ideas/2013/08/variable-pricing-models-work-for-tech-startups/ 1: G - 15(57) Price Discrimination

Since 2011, the show’s producers, Disney Theatrical Productions, have been relying on a previously undisclosed computer algorithm to recommend the highest ticket prices that audiences would be likely to pay for each of the 1, 700 seats at every performance in the Minskoff Theater. While other shows also employ this so-called dynamic pricing system to raise seat prices during tourist-heavy holiday weeks, only Disney has reached the level of sophistication achieved in the airline and hotel industries by continually using its algorithm to calibrate prices based on demand ticket purchasing patterns. 1: G - 16(57) Price Discrimination

Are owners really pricing irrationally? 1: G - 17(57) Price Discrimination

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Second Degree Price Discrimination Ø Ø Ø Quantity discounts Smaller purchaser generally has the less elastic demand (greater willingness to pay). Applications: Ø Ø Groceries Multiple site theme parks (Disney) 1: G - 20(57) Price Discrimination

Quantity Discounts at Disney World Number of Parks 1: G - 21(57) Price Discrimination

Quantity Discounts at Disney World Number of Days 1: G - 22(57) Price Discrimination

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Market Segmentation by Attributes Differentiation by product attributes Ø Ø Ø Key element: Price difference exceeds marginal cost difference Less precise than direct segmentation by identifiable characteristics of buyers Applications Ø Ø Ø 1: G - 26(57) Special seats in Manhattan movies Versions of software Books: Hardcover vs. paperback Concert seats Tickets to all sorts of entertainment events Ticket Pricing by “Value” Price Discrimination

An Opportunity for Price Discrimination Dec 2, 2015 - Another part of the plan, and one I hope will come true (like a dream), is the new Tidal Hi-Res/MQA service won't cost you any more than the current Tidal Hi. Fi price of $19. 99/month. How much music is available in Master quality? We have music over 30, 000 tracks from Warner Music Group, our TIDAL artist owners and key independent labels. We will continue to add more master-quality content over time. 1: G - 27(57) Price Discrimination

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Price Discrimination in Concerts. About 5% impact on gross revenues The Impact of Price Discrimination on Revenue: Evidence from the Concert Industry, P. Courty and M. Pagliero, Review of Economics and Statistics, 94, 2012, 359 -369. Frequency of price discrimination for acts with > 300 concerts. Discrimination defined as more than a single ticket price, e. g. , floor vs. bleacher. 1: G - 33(57) Price Discrimination

Real Differences in Aesthetics Not Proportional to Marginal Cost p Black Mac $1499 p White Mac $1349 What was going on here? 1: G - 34(57) Price Discrimination

Real Functional Differences Not Proportional to Marginal Cost $300 for 2 GB of memory and 90 GB on the hard drive. Marginal cost near zero. 1: G - 35(57) Price Discrimination

High Flying Price Discrimination 1: G - 36(57) Price Discrimination

“Business Class” for movie goers 1: G - 37(57) Price Discrimination

More Price Discrimination 1: G - 38(57) Price Discrimination

The Producers Price Index Price discrimination based on two attributes, seat location in theater and weekday & time. Further promotional discounts, day of show via TKTS = 3 rd dimension of discrimination based on risk of not seeing the show. Estimated impact on theater profit (compared to a 1 price strategy) 5% Price discrimination in Broadway theater, Phillip Leslie, The RAND Journal of Economics Vol. 35, No. 3 (Autumn, 2004), pp. 520 -541 1: G - 39(57) Price Discrimination

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1. Place of the seat relative to the stage. 2. Programming 3. Time and date of the show 4. Time of purchase 1: G - 41(57) Price Discrimination

Pricing Downloads 1: G - 42(57) Price Discrimination

Hard Cover US v UK Version; 9/13/07 ₤ 50. 34 = $102. 30 1: G - 43(57) Price Discrimination

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International Pirated Edition: Very Low Price! Renmin University of China All 827 pages 1: G - 45(57) Price Discrimination

A 2003 Mets Price Experiment 2001 -2: Discriminate by seat location 2003 -4: Discriminate by seat location and date/matchup 1: G - 46(57) Price Discrimination

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Two Aspects of Pricing Strategy p Cannibalization: Price tiers are not skillfully constructed p Bundling: Selling separate but related products together 1: G - 49(57) Price Discrimination

Cannibalization p Two level pricing system – the lower level may cannibalize the higher one n n p If the two prices are too far apart, the surplus from the lower priced alternative may exceed that from the higher one. Potential inelastic (high price) buyers may be drawn to the lower priced segment. Strategies n n Careful setting of the difference between high and low prices When segmenting by attributes, ensure that the attributes create real perceptible differences that consumers will value. 1: G - 50(57) Price Discrimination

Lion King, Orpheum, SF Segmentation by Attributes 1: G - 51(55) Price Discrimination

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Bundling p p Applications Cable TV n n p p Basic+Premium+Music Choice Econometric Analysis 6 th ed. with answers What is the strategy? (Not specific to experience goods: n n Phone services Car features 1: G - 53(57) Price Discrimination

Time Warner Cable Bundles 1: G - 54(57) Price Discrimination

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A music and shipping bundle 1: G - 56(57) Price Discrimination

THE Bundling Application p Block booking by the movie studios n n p THE PARAMOUNT CASE (1948) n n 1: G - 57(57) Forced rental of sets of movies Blockbusters were bundled with dogs Broke up vertical arrangements (studios owning theaters) Disallowed block booking Price Discrimination