Markets in Everything: Dynamic Pricing for Sports
Travel-related industries such as hotels, rental cars, and airlines have employed dynamic pricing techniques for years. Thanks to growing acceptance by sports teams and their fans, dynamic ticket pricing now represents the future of ticket pricing for both professional and collegiate sports, read about it here.
HT: Larry G.
53 Comments:
and another example:
" On New Year’s Eve, Dan Whaley, a tech entrepreneur in San Francisco, got into a black Town Car and was driven one mile to a holiday party. The ride cost him $27. At the end of the night out, Mr. Whaley took a Town Car home from the party. This time, the exact same ride cost $135.
Mr. Whaley was using Uber, a service that allows people to order livery cabs through a smartphone application. On New Year’s Eve, Uber, a start-up in the city, adopted a feature it called “surge pricing,” which increases the price of rides as more people request them."
http://goo.gl/wFFe8
Eh, dynamic pricing is only a half-step in the right direction, ie auction pricing. There's no reason you can't use eBay-type auctions for practically anything that is sold online, whether for sports tickets or anything else. Dynamic pricing is merely a half-measure to avoid going to full-on auctions, which some other leagues are already doing. There was a fascinating podcast interview with the CEO of Ticketmaster three months ago, where he talked much more about how they're experimenting with new ticket models and how the audience for live shows is down across the board. Of course, not everybody wants to wait to see if they win an auction or not, so the best model is a mix of the two: auction off half of your goods to determine what the market prices are, then use that information to offer the rest of the tickets with dynamic pricing and a price bump, to those who'd rather buy the tickets outright.
This is dynamic ticket pricing in action. Check out some of the prices for tickets to tonights LSU-Alabama game at StubHub:
http://politicsandfinance.blogspot.com/2012/01/recession-what-recession-check-out.html
Also known as yield management or pricing discrimination. Dynamic pricing does sound nicer.
It's possible to make a sport so expensive to attend or watch that widespread interest collapses.
Just look at boxing.
It's possible to make a sport so expensive to attend or watch that widespread interest collapses.
Thank dynamic pricing.
Larry G said...
Highway robbery.
This comment has been removed by the author.
Whether you like it or not, dynamic pricing is not a free-market principle because one side has information the other side does not have: the unique price paid for the perishable good.
To have true price transparency or a free market so that buyers can make informed choices using symmetric information with the seller, the price paid for every airline ticket should be on a name tag each passenger wears, the door of every hotel room sold that day, and on the back of every seat sold at a single sporting event.
Buyers cannot beware unless they are first aware.
Walt G. said...
The problem is that tagging people would be at a point too far to be any good.
Sprewell said...
One more reason why removing the anti-scalping laws was a mistake.
We get highway robbery with Uber, and your situation as well.
"The problem is that tagging people would be at a point too far to be any good."
That does not really matter. I am not making a judgment call one way or another about pricing discrimination/dynamic pricing.
Pricing discrimination depends on one group of people being willing to pay more than another group of people. That willingness, for the most part, relies on the people paying more not knowing how many people paid how much less and when. The seller has that information, and the buyer does not. Simply put, that is a violation of basic free-market principles.
sethstorm claims sprewell posted the following coment: "One more reason why removing the anti-scalping laws was a mistake"...
He did?
I don't see it in these comments of this particular posting...
Pricing discrimination depends on one group of people being willing to pay more than another group of people. That willingness, for the most part, relies on the people paying more not knowing how many people paid how much less and when. The seller has that information, and the buyer does not. Simply put, that is a violation of basic free-market principles.
The only way that is corrected is through a return to fixed pricing. Such a return restores symmetry of knowledge - as both seller and buyer know what to expect.
Auctions can't do that.
Dynamic pricing can't do that.
Tagging people can't do that soon enough.
Juandos:
I'm replying to the entire message without cut-pasting the whole thing in.
sethstorm,
I think people should pay what they are willing to pay whether it is more or less than the other person. These same people should know their options, and, as I understand it, free market principles are built on both parties having equal access to that type of information.
Not all price transactions are as transparent to the customer as Larry G's cab service. Should they be? Maybe that is the difference between someone who is always poor and someone who is temporarily broke.
"I'm replying to the entire message without cut-pasting the whole thing in"...
So you're lying again sethstorm since the term 'scalping' isn't what sprewell said in his comment or even inferred it...
You keep forgetting that no one is forced to buy the tickets in the first place...
seth-
you are way off on most of your comments.
first off, dynamic pricing cannot result in huge price hikes that kill a sport. if lots of seats are unsold prior to an event, pricing goes down and they get filled. the point of dynamic pricing is to sell all the seats.
second, your criticism of uber is foolish. you are just preferring rationing to paying more for guaranteed service.
as it happens, i was in san francisco for halloween. on halloween or NYE, you cannot get a cab to save you life in sf. you assume a high price is "robbery". i would gladly have paid it to get home from a party on treasure island, but uber was unable to lock on to my location. had it been able to, i would have had another option, increasing my liberty and making my life better.
instead, i had to spend 90 minutes in a scrum of people fighting desperately to get into one of a tiny trickle of cabs.
if i could have paid up and not had to do that, i would have done it in a heartbeat. it would have been totally worth it to me.
perhaps you'd rather spend 2 hours waiting. hey, that's up to you. go for it. but to assume i share your preferences is arrogant and to presume that you ought to be allowed to force me to act as you would like is fascist.
this seems to be the common thread running through your comments today: that you know best what prices should be and what products should be like and that you feel entitled to force that upon the rest of us.
"Pricing discrimination depends on one group of people being willing to pay more than another group of people. That willingness, for the most part, relies on the people paying more not knowing how many people paid how much less and when."
that's not true at all.
perceived value of things changes all the time. a hotel room in Baltimore may be worth X one day, and far more the next if it becomes certain that the world series will be there.
airlines alter seat pricing to fill planes.
buy early, get a deal, buy a week before, pay more, wait until he day before and maybe you get a killer deal, maybe you can't get a seat.
it's all based on what the seller wants at a given time.
this is not about informational asymmetry at all.
it's also about personal preference. personally, i'd never pay the going rate for superbowl tickets. clearly, a lot of people would.
that's what makes a market.
there is nothing sinister about different people putting different values on the same product. it's inevitable. we want different things.
some pay up for a lamborghini aventador, some think it's a colossal waste of money. that's what makes a market.
this whole notion of "pricing discrimination" is absurd.
if you list your home for $1 million and a buyer offers you that much then another offers $1.1 million, why, all else equal, would you not prefer the second offer?
when you sell you home, you seek the best bid. why would the owner of a stadium seat be any different?
I think people should pay what they are willing to pay whether it is more or less than the other person.
As long as you wish to use dynamic pricing to get to that point, you will never achieve symmetry when it comes to knowledge of buyer and seller. The buyer will always be behind, the seller always ahead.
Whether someone experiences force or not in the transaction is immaterial.
Predictability in pricing maximizes the amount of knowledge to all participants.
morganovich said at 3:01pm...
That sounds more like a fault of being unable to get Uber's service and less being unable to get a cab. Dynamic pricing wouldn't change the amount of cabs, but it sure would have put a lot more inebriated folks on the streets.
Plan ahead on transportation if something's going to be that bad.
"As long as you wish to use dynamic pricing to get to that point, you will never achieve symmetry when it comes to knowledge of buyer and seller. The buyer will always be behind, the seller always ahead."
what a total load of nonsense.
ever buy or sell a stock seth? that's the most extreme example of dynamic pricing there is.
i for one, only buy when i think i know more than the seller.
why is buying anything else any different?
if i hear that the SF giants are going to the world series before the hyatt in sf or united airlines, i can use that to get a great deal on a room/tickets.
you are just flat out making up some absurd notion and putting forth "symmetry" as a goal when, clearly, it can NEVER exist.
the buyer and seller of ANYTHING never have symmetry of knowledge. it's impossible. neither will 2 potential buyers have the same knowledge or even reasons for wanting to buy.
the whole standard and goal you propose is as ridiculous as it is impossible.
"Dynamic pricing wouldn't change the amount of cabs, but it sure would have put a lot more inebriated folks on the streets."
um, no, it wouldn't. the number would be exactly the same. same number of cabs, same number of trips. the only difference would be who got them and at what price (assuming dynamic pricing for cabs) and more money for cab drivers. do you think at all before you right seth? you are not even making the rudiments of sense.
further, you are also totally wrong about more cars being available. the whole point to uber is it does not use licensed cabs, but rather limos, towncars etc.
unlike cabs, these can respond to high prices by upping supply. tales of $135 rides would induce more drivers to work NYE the next year. that would result in MORE RIDES and LOWER PRICES than the year before.
bottom line is it's clear in SF on NYE that there is a massive excess demand for rides. you seem to oppose serving it.
then you say something like this:
"Plan ahead on transportation if something's going to be that bad."
and how, pray tell, am i going to do that? hire a car all night? that's $800. why on earth would i not prefer to pay $100 and get the ride when i want it?
drive? oh, yeah, great option. my friends and i would gladly pay $100 to not have to stay sober.
uber lets you plan ahead. what is it you hate so much about consumer choice? sound like class envy manifesting itself as facsicm and price controls to me. you want rationing by random change (at the expense of drivers) as opposed to letting resources go where they are valued most. that's just self serving rationalization.
you need to get a grip seth, you are talking utter nonsense here.
I'm amused. I would think that dynamic pricing is the ultimate for a free market and very libertarian.
The airlines have been doing this for years and with the advent of internet can ...and do.. vary the price even by the minute according to demand.
the buyer always knows the price because they commit to the sale.
If you don't like the price, don't buy.
if enough people don't buy, they lower the price.
but it goes the other way also.
the buyer always knows the price because they commit to the sale.
No, they do not know the price until immediate before the sale - for lack of airlines that use predictable pricing.
" No, they do not know the price until immediate before the sale"
not sure I understand but at any rate.. how would you "fix" that problem?
I find this discussion interesting because I am currently teaching an operations planning class. We are analyzing a classic business case of selling airline seats. Profit maximization occurs selling out the last first-class seat for full price at the last moment. The airline that gets the algorithm to forecast how to do this the best wins while the other airlines lose.
Morganovich, I don’t think buying and selling stocks fits the pricing discrimination model because stocks are more like inventory than perishable goods. If you don’t sell a stock today, you can still sell it tomorrow, but you never can fill an airline seat tomorrow you let fly empty today.
walt-
"If you don’t sell a stock today, you can still sell it tomorrow, but you never can fill an airline seat tomorrow you let fly empty today."
1. i'm not sure that's true. if i think apple is going to miss the quarter, i am under serious time pressure to sell. tomorrow, it might be down 30%.
2. so what? who cares if it's durable or not durable? what difference does it make to pricing other than, in the case of something that goes bad/expires giving leverage to a buyer as time goes on?
if you sell you home, you practice discriminatory pricing. you seek the best bidder.
if i am selling a concert ticket, it's the same thing. i want the best bidder, i am just under more pressure, because i need to find one pre concert or it's worthless.
i do not see why there is any other meaningful difference.
seth-
your arguments are making less and less sense.
you only know the price of anything right before you buy it.
you can buy gasoline today, or wait a week and see what the price is.
you can buy oreos today or wait and see if they go on sale, or maybe up in price.
i don;t have the slightest idea what it is you seem to want. that any seller or potential seller of any item post what the price will be at ever time from now until infinity?
airline pricing is actually quite predictable. it tends to be lowest 2-3 weeks before a flight (unless you get lucky and get a last minute ticket).
whether something is "perishable" or not is not the same if a product is short (or excess) in supply.
It would make good sense to use dynamic pricing for perishable goods but non-perishable goods can also benefit from dynamic pricing.
a really good example of "dynamic pricing" is simple mark-down sales when there is an excess of inventory and a shortage of demand - at the price offered.
Christmas stuff... often gets marked down 25,50, 75, 90% is fairly quick succession even though it's not going to "go bad".. it just sits in inventory for another year.
"it might be down 30%."
A perishable good is worthless.
"if you sell you home, you practice discriminatory pricing. you seek the best bidder."
And the price paid is public knowledge by law. I just got back from a successful mission today to the Michigan Tax Tribunal to lower my property tax assessment by using knowledge of sale prices in 2010 of comparable property to mine (-14% change). Knowledge, and knowing how to use it, is power.
The airlines' pricing model keeps a percentage of seats to sell at full price almost until the plane leaves. The objective is to correctly analyze past trends to know what percentage to use.
Three necessary criteria for pricing discrimination to be successful from the textbook:
1) a fixed supply
2) perishable goods that are worthless in a known period of time
3) groups willing to pay more or less than other groups for the same product or service
walt-
so what?
you never described any way in which a perishable good is any different from a durable one except for greater pressure on the seller.
i don't see what any of you points demonstrate.
the price paid on a house may be public knowledge (after the fact) but what good does that do a buyer beforehand? you get better info from travelocity. unlike you and you home, untied airlines must take you bid when you click "buy".
i can offer you your full list price on your house and you do not need to sell to me.
that all seems like a non sequitor.
all pricing is based on decision theory. you can ignore my offer on your house, but maybe it'll be the best one you get and perhaps when you realize this, it'll be gone.
it's just like airline seats. you try to balance price maximization with time, information, risk, etc.
i don't see how there is any difference apart from more time pressure in one case. that just affects the model parameters, not the model itself.
walt-
that's an incredibly strange and overly specific definition.
why do you need perishables to exercise discrimination on price?
that definition makes no sense.
how is it any different than figuring out which offer on a house to accept?
frankly, the latter is more difficult as you have no idea how many offers there will be or what they will look like.
you seem to be fixated on a meaningless distinction from a textbook. it seems indefensible to me.
it's all the same information theory.
also:
airline seats (from the standpoint of a consumer) are essentially unlimited. sure, a given plane can fill up, but there will be plenty more later.
alternately, there is only one of my house. if it sells, a buyer might not be able to buy it again for decades (if ever).
that's far more perishable from a buyer's standpoint than a plane flight.
i think your book is just trying to bound a specific kind of system and being far too limiting as a result. it's a totally arbitrary distinction and only takes one side of of the transaction into account.
I notice that WalMart (and others) mark down the price of meat even before the "use by" date.
the meat is still safe but offers good savings to those looking to save money.
the "dynamic" appears to be on a one day cycle.. as the meat guy comes out every money and affixes lower prices on the packages...
in this case.. I know from my activities at the food bank that at some point - the marked down meat is frozen and given to the local food pantry and I'm sure WalMart is able to write this off either as a charitable donation or a business loss - not sure which.
but this is a rudimentary kind of "dynamic" pricing.
but what is driving the ticket prices and other products is the internet and the ability to fairly quickly assess the current demand and then to fairly quickly adjust the prices.
At some point I would not be surprised to see things like ticket prices vary by the minute... as in the case of the cabs on call... do... or toll roads do.
morganvich,
The perishable criterion, according to the book, is to eliminate arbitrage. Airlines use sophisticated computer programs to try to catch travel agents buying blocks of cheap tickets early against the rules using different names. I am not expert here, I think this is your area of expertise, but what is the worth of an option that does not have an expiration date?
To the airline, that same seat cannot be sold later.
Larry G.
Electricity is priced by the 1/10 of an hour (6 minutes) off the electrical grid for industrial customers.
I think we have to make a distinction between when pricing discrimination can be used and when it should be used. If profit maximization is the objective, the best alternative pricing methodolgy by the seller should be used. That will not necessarily be dynamic pricing.
" best alternative pricing methodolgy"
I would think dynamic pricing would offer the most options...
but what would be some competing alternatives?
Larry G.
Fixed prices are much more common than dynamic prices. The ability to charge customers different prices for the same product or service is not always practical, profitable, or legal.
Walt, fixed pricing is an artifact of a few places within the last century that used what was the cheapest tech for the time, ie massive grocery and other dept stores in the US and other rich countries that employed price stickers and very few retail employees. Throughout most of history and most of the world today, dynamic pricing, auctions, and price discrimination are dominant. Enter any third world bazaar and you'll find that every merchant is performing all three against you. ;) To this day, large sticker purchases like cars or houses have salesmen who still employ these techniques in the US. With the introduction of the PC and the internet, we can let the computers employ these techniques and not waste our time haggling, so all these methods are coming back.
eBay has a simple version of all this already, where you enter your maximum bid for that laser pointer you want and eBay will automatically bid for you up to that amount. If nobody matches your high bid, you pay less. There will be much more complicated bidding and sales software to do this for us in the future, but the basic idea is the same: you will express some preferences and the software will do the rest. So it will be practical and profitable to do much more than dynamic pricing. As for legality, it would be dumb to put in laws to chill all this innovation and the laws on the books banning this stuff already are beyond stupid.
"I am not expert here, I think this is your area of expertise, but what is the worth of an option that does not have an expiration date?"
why treat this like an option? that seems like a questionable premise.
let's consider an example of a non perishable.
you have just built a building full of condos.
it cost you $20 million, you have 30 condos. how do you maximize you profit?
it's just like the airline equation. arbitrage is not really an issue for the most part, but if it is, you can use it to your benefit (sell a unit pre construction to a speculator and use it as cheap project finance).
also note: perishability has nothing to do with arbitrage. they are completely separate issues. a concert ticket is perishable, but scalpers engage in arbitrage. i don't really see the linkage there. airlines block such through policy, not through anything to do with perishability.
so, if you have 30 units to sell, they do not go bad, but they cost you to hold (interest, opportunity cost, etc)
the decision theory around selling them is much more complex than around an airline seat, especially as prices tend to be stickier based on the last transaction.
but it's really the same situation.
i think you are mistaking airline restrictions on transfer for some effect of perishability.
i have long thought it would be fascination to open a bar on wall st with dynamic pricing.
you could have half the bar be a regular bar and the other half be stations with dynamic pricing. the bartender mixes up a round of drinks and then "what am i bid for 4 no slat margaritas?" and off you go. during slow times, you could get deals. during busy times, you might pay up to not wait for your drinks.
i suspect it might well make everyone happier. i'm not sure what it would do to profits (unless you put a floor on bids).
i suspect it would run into trouble around time to get a round served during crowded periods, but it would be a really interesting experiment for an econ professor at a campus bar.
Airlines will not sell early tickets in bulk to resellers. They even employ specially trained detectives whose only job is to try to catch people doing that.
Personally, I don't have a problem with dynamic pricing. I like to analyze processes to see what makes them work or fail. Legally exploiting weaknesses in systems is how money is made whether people want to admit it or not, but it is not for the weak-hearted, and you might not want to brag about it.
I think happiness and profit maximization goes hand-in-hand to the businessman--at least the ones that stay in business. I believe the drinker just wants another drink until he runs out of money. That's why happy hour lures them in (marketing) and stops before they leave (profit maximization).
I think the idea of a 100% loss can be helpful. Too many people worry about sunk costs that they can't make a rational decision using current information. Having a drop-dead date forces a decision. The condo owner never expects a 100% loss.
even WalMart supports dynamic pricing - their famous "price match"... just show the correct documentation and Voila - price drop!
Larry G.
I think you are confusing a marketing strategy from a dynamic pricing model from Wal-Mart’s perspective with their price-matching policy. It’s a pretty loose definition to say you have dynamic pricing just because the customer paid less than he could have.
All of the computer algorithms for dynamic pricing that I’ve seen depend on whether the price goes up or down as the target date gets closer and the supply goes up or down (the target date is important because it is one of the main factors in the pricing model—the other main factor is the supply left from a fixed starting amount). Of course, there are a lot of pricing models other than the dynamic ones to enhance revenue and/or maximize profits (which is not the same thing).
Walt - it was sort of tongue-in-cheek but now days we have smart phones that can scan a bar code and then find other stores selling the same thing and their prices - the potential for a company like Walmart to automatically adjust their prices does exist.
certainly on non-food discretionary items these days - price shopping has become rampant.
I know that you study this and I admit I don't....so I acknowledge that.
But in terms of inventory for something like milk even - WalMart and other sellers have to constantly monitor and adjust their inventories and still end up with overages and lost sales depending on demand.
What if they self-adjusted their inventories with dynamic pricing?
in other words.. how would you differentiate to a markdown sale due to excessive inventory .. and further markdowns to flush the remaining inventory - and setting an initial price and adjusts it according to demand?
sales to reduce inventory are more than just marketing strategies, right?
Larry G.
My background is not in dynamic pricing. I have done a bit of project management using MRP and ERP.
"You" wouldn't technically do the pricing. A computer program would use algorithms from factors such as time to perish and amount left with discreet probabilities for each. Then, someone would make a judgment call using that data of what the acceptable targets would be (e.g., do you want a 20% chance of having to throw out 10 gallons of milk or a 5% chance?)
Marketing and cost analysis are two separate functions. I imagine the price-matching policy drives the cost analysis guys crazy. Cost people want numbers that keep the high and low ranges of their estimates closer together. They get fired for things not in their control sometimes. Try estimating a job and then finding out the foreman let all of the employees have Monday and Friday off unscheduled with pay (either timelines will slip or cost will go up).
I would think (hope) that WalMart would want a pricing scheme that resulted in the most profits and the least milk thrown out.
the question is - if the priced it dynamically would it accomplish that better than the current pricing?
I note that WalMart right now reduces the price of meat when it start approaching the sell by date. The meat is still good but has less shelf life and has to be used sooner. I'm a big customer. :-) At least until someone does a study and finds that mark-down meat has twice as much nasty critters in it or some such.
"I would think (hope) that WalMart would want a pricing scheme that resulted in the most profits and the least milk thrown out."
Why? If profit maximization and not waste is the objective, I don't care how much milk I throw out if I can sell 1 gallon for $1000 profit instead of 999 gallons for $1 profit each.
"I note that WalMart right now reduces the price of meat when it start approaching the sell by date"
What do you do when 75% of your customers wait for the price to be reduced instead of the 25% you forecasted when you set the date you would sell at the reduced price? You might be better off leaving the price higher for longer and just throwing the meat out.
Walt - I don't know about the milk but I know about the meat.
When it reaches the sell-by date WalMart pulls it, freezes it, and gives it to the local food pantry.
in terms of maximizing profits verses throwing milk out..I would think there is a cost to throwing milk out.. in terms of taking up space in inventory and then having to pay people to pull it and handle disposal of it.
I would think (hope) that WalMart has a moral aversion to waste if for no other reason than as a PR risk.
Larry G.,
You are wondering all over the place, so let’s break the strategy down a bit. Here's how processes (pricing and others) work: 1) you have to define what you want to do, how you are going to do it, and what resources you need, 2) you decide how you are going to measure your performance and set targets, and 3) you determine how you are going to change your process if you do not meet your targets within a specified amount of time (feedback loop).
Of course you have to work with other people in the organization who share the same vision and mission. Sometimes other departments’ performance measurements going up will cause yours to go down, but usually if everyone does their part well, and leadership pulls them all together, the organization will be successful.
Efficiency and effectiveness often work against each other. It’s very effective from a reliability perspective to change the oil in your car every day, but it’s not very efficient from a cost perspective. There are always trade-offs and decisions to be made. The people who make good decisions work and the people who make bad decisions don’t.
I would think in the milk scenario the goal would be simple - profit.
but you'd have to take into account your other costs of inventory and labor.
It gets into things like how many rows of 2% verses whole milk, verses skim ...etc... quarts, half gallons, gallons. I understand that and realize I know zip about it.
I suspect that WalMart could teach a course on this themselves since they are in many respects world class in how to keep costs down.
and if dynamic pricing expands into more consumer goods and services, I'd not at all be surprised to see WalMart get on the bandwagon.. perhaps lead it.
Milk is not a good example because it can be used to get people in the door, so you could make a business case to just give it away. A lot of things seem simple until it is your job to make them happen better than your competition.
Walmart is great at collecting data that can be used to drive decisions, but many people are successful from gut-driven decisions that others in their position would not or could not make (think Ford).
I think the folks who rely on data-driven decisions ultimately prevail though (these days).
there are still some Steve Jobs types around but we sort of have seen what the "gut" does for Netflix and more recently Verizon...
the consumer has more and more tools to determine best price, best value and the companies that pay attention to that are going to do better than companies that don't.
and I still think WalMart has turned it into an artform... of sorts.
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