Inelastic sports ticket pricing, marginal win revenue, and firm pricing strategy: A behavioral pricing model

Purpose A standard result of firm theory is that a monopoly maximizes profit somewhere along the elastic portion of its demand curve. However, empirical studies of sports ticket pricing routinely find that (home) teams price along the inelastic portion of demand. Despite compelling theoretical expla...

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Bibliographic Details
Published in:Managerial finance 2016-01, Vol.42 (9), p.922-927
Main Authors: Chang, Yang-Ming, Potter, Joel M., Sanders, Shane
Format: Article
Language:English
Subjects:
Demand curves
Economic models
Market strategy
Monopolies
Present value
Prices
Pricing policies
Production costs
Professional baseball
Profit maximization
Profits
Success
Ticket sales
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Summary:Purpose A standard result of firm theory is that a monopoly maximizes profit somewhere along the elastic portion of its demand curve. However, empirical studies of sports ticket pricing routinely find that (home) teams price along the inelastic portion of demand. Despite compelling theoretical explanations of this finding, at least one important factor remains unconsidered. A profit-maximizing team considers not only direct marginal revenue and direct marginal cost when setting a ticket price but also deferred, strategic benefit (revenue) from present game success. The paper aims to discuss these issues. Design/methodology/approach Prior literature finds that a given win is valued in that it generates additional future revenue and likelihood of home victory rises,ceteris paribus , in crowd density. The authors construct a firm profit maximization problem in which a sports team considers both present and future revenue when pricing home games in the present period. Findings If the deferred benefit is sufficiently large, a forward-looking, profit-maximizing team prices along the inelastic portion of its static demand curve. Importantly, this same price falls along the elastic portion of the firm's (empirically unobserved) dynamic demand curve. Originality/value This is the first model of sports ticket pricing to recognize the intertemporal nature of demand for a sports match.
ISSN:0307-4358
1758-7743
DOI:10.1108/MF-02-2016-0047