Wednesday, April 14, 2010

IPL Tickets & Price Discrimination

An office discussion on the availability of tickets for the IPL final (which are already sold out) started this particular train of thought.

There is a concept known as price discrimination in economics. Roughly it means that people end up buying identical goods or services at different prices from the same provider, which may happen due to a variety of reasons.

We witness price discrimination in various forms and various markets. Different consumers attach different values to the same or similar products or services. Thus, different people are willing to pay different prices for a product / service which costs the same. Thus, if a seller wishes to maximise her profits, she should sell the product / service to each customer at the price which the customer wants to pay. However, in a perfect market, this will not happen and the goods or services get transacted at the market clearing price (where supply meets demand). The difference between what the consumer is willing to pay and what she ends up paying (if its less) is called consumer surplus.

However, under certain conditions, sellers may be able to practice price discrimination i.e. charging different prices for exactly the same product / service. Usually such price discrimination can arises and be sustained much more easily in a market with one / few players where the goods or services are non-transferable and non-replicable. It arises much more frequently in services rather than goods markets because services are far likelier to be non-transferable and non-replicable.

The best everyday example of such price discrimination is air tickets. An air ticket represents the right to travel from one place to another on a particular date and at a particular time. It meets all the requirements stated above:

1) The experience and process of travelling from a particular place to another on a particular time and date is non-replicable

2) Once the ticket is bought in someone's name and assuming suitable measures are in place to prevent someone else from travelling using that ticket, it becomes non-transferable

3) The number of players is few

4) Information about pricing from the cost side is relatively restricted. You don't know what the airline is looking at when it's setting the price for its tickets. Hence you cannot really negotiate with it. You only know how much the journey is worth to you and hence how much (upto a certain maximum) you would be willing to pay for it.

5) The value attached by different people for the same journey will be different.

I have been wondering whether there was a case for the IPL organisers to do something similar with the pricing for IPL tickets.

The current pricing incorporates some amount of price discrimination, which is common to almost any live performance anywhere i.e. differential pricing based on the seating arrangements. So you will have your common stands (by which I mean those contiguous blocks of concrete), stands with chairs, executive lounges, closed AC boxes, pavilion stands etc

Note that here the difference in prices usually does not correspond to the difference in costs. In certain categories e.g. stands with chairs and common stands, there may not be any difference in the running costs at all. Still the prices will be substantially different.

Going a step further, perhaps the IPL guys could have employed price discrimination by keeping the price within a particular category variable. A simple numerical example may make it clearer:

Let us say they have 10,000 seats to offer. Right now they have priced each ticket at Rs 1000. Assuming the match had a full house, they earned 10,000 * 1000. Note that here each of those 10,000 people who bought tickets was willing to pay a minimum of  Rs 1000 to watch the match.

Now lets say they introduce a jump of Rs 100 in the price for every 10% of tickets booked.
So the first 1000 tickets get sold at Rs 1000
The next 1000 at 1100
The next 1000 at 1200

And so on. They will then earn an average of 1450 per ticket sold i.e. 1450 * 10,000

Of course, this is an oversimplification. The pricing algorithm will need to be much more robust. But the basic point remains that it could have been employed.

The most important requirement here is that there should be a sufficient number of buyers at the highest prices also. So it may end up as a tapering structure with less buyers at every price level as it goes higher.

They would have had to work really hard to ensure that they get the demand curve right.

Further, in case of matches with high demand, they would have pocketed the profits which black marketeers would otherwise earn! Funnily enough, when demand is sufficiently skewed, black marketeers ensure higher economic efficiency by pocketing the consumer surplus, which would otherwise be lost!

Lots of caveats / restrictions / difficulties in this:

1) Numbers. An average plan carries 200 odd passengers. Here the number of people for each match is in thousands. However at the end of the day, its only computers doing the job so shouldn't really matter. And even in case of airlines with 30-40 flights a day, each such airlines is doing this for 6000-8000 seats daily and around 2 lakh monthly! So it may not be that bad really.

2) Regulatory restrictions - I am frankly not aware whether there are any laws or restrictions which prevent this.

3) Basic consumer perceptions - Discriminatory pricing is accepted by the public in airline tickets. I am not sure how they would perceive it for cricket matches.

4) Non-transferability - This is arguably the most important point. If the tickets are transferable then arbitrage is possible. Lets say I buy a ticket at 1000. Now the IPL website is selling tickets at 1100. If the tickets are transferable, I can sell it to someone else at 1099 and he would still buy it from me. However eventually, with enough genuine demand (i.e. people want to see the matches and hence do not sell tickets to make profits) and the right pricing, such resale may eventually get over and the fresh set of people would then need to buy from the IPL website itself.

They could have at least experimented with price discrimination in a smaller way.

A simple way to do this, in my opinion, would have been to do a Tatkal kinda thing - opening bookings for a limited number of seats say one day before the match. Price discrimination would be more acceptable and easier to implement in such a situation.

Comments and criticism most welcome.

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