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TKTS and Other Schemes

Economist Hal Varian discusses a dramatic example of price discrimination.

The Dynamics of Pricing Tickets for Broadway Shows

As avid theatergoers know, ticket prices have been rising inexorably The top ticket price for Broadway shows has risen 31 percent since 1998, But the actual price paid has gone up by only 24 percent. The difference is a result of discounting. Savvy fans know that there are deals available for even the most popular shows, with the most popular discounts being offered through coupons, two for one deals, special prices for students, and through the TKTS booth in Times Square.

Why so much discounting? The value of a seat in a theater, like a seat on an airplane, ‘is highly perish,able. Once the show starts or the plane takes off, a seat is wort next to nothing. In both industries, sellers use a variety of strategies to try to ‘ensure that the seats are sold to those who are willing
to pay the most.

This phenomenon was examined recently by. a Stanford economist, Phillip Leslie, in an article, Price Discrimination in Broadway Theater, published in the autumn 2004 issue of the RAND Journal of Economics. Mr. Leslie was able to collect detailed data on Broadway play, Seven Guitars. Over 140,000 people saw this play, and they bought tickets in 17 price categories. Some price variation was due to the quality of the seat orchestra, mezzanine, balcony and so on-while other price differences were a result ‘of various forms.of discounting. The combination of quality variation and discounts led to widely varying ticket prices. The average difference of two ticket chosen at random on’ a given night was about 40 percent of the average price. This is comparable to the price variation in airline tickets,

Last time I was in New York. I was pleased that I managed to set a ticket to “The Producers” for half price. It almost made up  the fact that I had to book my airline ticket two weeks in advance and stay over a Saturday night.

Financial Aid Many colleges and. universities give financial aid to needy students. One can view this policy as a type of price discrimination. Weldthy students have greater financial resources and, therefore a higher willingness to pay than needy students. By charging high tuition and selectively offering financial aid, schools in effect charge prices to customers based on the value they place on going to that school. This behavior is similar to that of any price-discriminating monopolist.

Quantity Discounts , our examples of price discrimination, the monopolist changes different prices to different customers. Sometimes, however, monopolists price discriminate by charging different the same customer for different units that the customer buys. For example, many firms offer lower prices to customers who buy large quantities. A bakery might charge $0.50 for each donuts but $5 fora dozen.