Entertainment and Media: Markets and Economics

1. Entertainment and Media: Markets and Economics Price Discrimination

2. Pricing and Value from the Consumer’s ViewpointMarket prices and willingness to pay

3. Perfect Price Discrimination • 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

4. Attempt to apply first degree price discrimination • Yield Management: A form of price discrimination • Fixed, perishable product • Low (or zero) marginal cost • Segmentable markets • Applications • 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)

5. A General Rule for Price Discrimination(Strategic Pricing) • 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

6. Market Segmentation • Different prices to different buyers of the same commodity • Making it work • 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 • Men’s and women’s shirts at dry cleaners

7. Third Degree Price Discrimination:Monopoly pricing in each segment Inelastic Market Segment:Movies;General Admission Elastic Market Segment: Movies;Kids, Seniors P,MC PHIGH PLOW Tickets

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

9. Two Segment Market Why do the elasticities differ?How can North Holland prevent arbitrage?

10. Two Price Regime at Amazon Prime

12. Magic Pricing Kingdom

13. 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.

14. Dynamic PricingElements of pricing by attributes. Attributes change over time and elasticities change when they do.

15. 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/

16. 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 and ticket purchasing patterns.

17. Are owners really pricing irrationally?

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

21. Quantity Discounts at Disney WorldNumber of Parks

22. Quantity Discounts at Disney WorldNumber of Days

26. Market Segmentation by Attributes Differentiation by product attributes • Key element: Price difference exceeds marginal cost difference • Less precise than direct segmentation by identifiable characteristics of buyers • Applications • 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”

27. 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 HiFi 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.

33. 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.

34. Real Differences in Aesthetics Not Proportional to Marginal Cost • Black Mac $1499 • White Mac $1349 What was going on here?

35. Real Functional Differences Not Proportional to Marginal Cost $300 for 2GB of memory and 90GB on the hard drive. Marginal cost near zero.

36. High FlyingPrice Discrimination

37. “Business Class” for movie goers

38. More Price Discrimination

39. The Producers Price Index Price discrimination based on two attributes, seat location in the theater and weekday & time. Further promotional discounts, day of show via TKTS = 3rd 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

41. 1. Place of the seat relative to the stage. 2. Programming 3. Time and date of the show 4. Time of purchase

42. Pricing Downloads

43. Hard Cover US v UK Version; 9/13/07 ₤50.34 = $102.30

45. International Pirated Edition: Very Low Price! Renmin University of China All 827 pages

46. A 2003 Mets Price Experiment 2001-2: Discriminate by seat location 2003-4: Discriminate by seat location and date/matchup

49. Two Aspects of Pricing Strategy • Cannibalization: Price tiers are not skillfully constructed • Bundling: Selling separate but related products together

50. Cannibalization • Two level pricing system – the lower level may cannibalize the higher one • 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 • 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.