In the previous post we set out the basic idea behind price discrimination: your potential audience has different maximum prices they are willing to pay for what you have on offer (their "reservation prices") and you want to find a way to get individuals to pay something close to their personal maximum, so long as it covers their marginal cost to you. Two-part pricing is a type of indirect price discrimination: everyone is offered the same deal when it comes to prices, and they choose options that reveal whether they have high or low … [Read more...]
A primer on price discrimination
My previous two posts dealt with different aspects of price discrimination, and since many future posts will cover the topic from various angles, I think it worthwhile to go over a few basic ideas and definitions. Marginal cost will be defined here as the cost to your arts organization of serving one more customer. It might be one more person through the turnstiles of your museum, one more person taking a seat for your performance or festival. For the examples just given, marginal cost might be very close to zero - it costs nothing at all to … [Read more...]
Discounts for the price-conscious well-informed consumer
A little more than a year ago, J.C. Penney's new management announced a change to its pricing strategy, in an effort to turnaround the troubled store - get rid of "nonstop promotions" and move to a simpler pricing structure. In the current issue of the New Yorker, James Surowiecki tells of the resulting fail: The biggest problem with [J.C. Penney CEO Ron] Johnson’s strategy is simple: he misread what Penney’s customers wanted. Doing away with constant markdowns was, on the face of it, sensible: instead of starting with a high price and quickly … [Read more...]
Consumer optimism at the gym and the museum
While at the gym this morning I got to thinking about ... what I pay to go to the gym. I have a membership, although the option of day passes is available to me. The rational thing for me to do at the start is to figure out how often I intend to go, and calculate which is the better deal, membership or day passes. I know that I am more likely to go more often with a membership because the monetary marginal cost to me (although not the cost in time) will be zero dollars per visit, and I should take that into account. But are people rational … [Read more...]
Why Is Dynamic Pricing So Rarely Used?
As technology has come available that allows performing arts organizations to adjust prices in light of demand, the question has arisen: is it appropriate for nonprofit theaters to employ dynamic pricing? See here and here for example. Let's consider the issue from a different angle: why is dynamic pricing so rarely used in the for-profit sector? For example, at my local multiplex cinema, I will pay $5 for a weekday matinee, $7.50 for weekday evening or weekend matinee, and $10 for a weekend evening. It doesn't matter whether the film I … [Read more...]
Targets, The Cost of Bread, and Nonprofit Arts Pricing
My previous post drew lessons for museum pricing from what we observe in the prices set by cable television providers. But how can for-profit pricing be relevant to nonprofit museums, to orchestras and opera? Don’t the nonprofit arts, unlike cable companies, have a mission to be accessible to all patrons, regardless of income? Let me draw from what might seem at first a very unrelated policy issue. All rich countries except the US raise government revenue through value-added taxes (VAT). These are sales taxes applied to all goods and … [Read more...]
Museums, Amusement Parks and Cable TV
Should museums charge visitors according to the length of their visit? In a recent paper Bruno Frey and Lasse Steiner argue they should. We pay per hour when we park our cars, so why not when we go to view art? This question came to mind during the recent flare up over the pricing of cable television. Yes, cable television and art museums (and amusement parks!) have something in common. Those of you who subscribe to cable television know that even the most basic package contains a lot of channels, many of which you never intend to watch. … [Read more...]