Sports Ticket Pricing — Dutch Auction Method
As a fan of a big football school, I know how quickly college game day tickets can sell out. However, for a school like Northwestern, where selling out games is seen as an accomplishment, finding methods to estimate demand and students’ willingness to pay is crucial to maximizing profit. Accordingly, Northwestern professors Jeff Ely and Sandeep Baliga pursued a joint project with the athletic department dubbed “Purple Pricing” to find a ticket pricing optimization model for the Northwestern football team.
Purple Pricing offered a novel kind of dynamic pricing. Similar to airlines or concert tickets, prices were matched to demand; however, a distinction in Purple Pricing was that the price of tickets only went down only time. This type of pricing — a Dutch Auction — was utilized in two home games for Northwestern against Ohio State and Penn State, two of the school’s Big 10 rivals. The guidelines were as follows:
“This price may decline as the game date approaches, but it will never increase.
You are protected if the price is reduced after your purchase because you will be refunded the difference. If you bought a 200-level seat we will refund you the difference between the final 200-level seat price and the price you paid. (Similarly, if you bought a 300-level seat we will refund you the difference between the final 300-level seat price and the price you paid.) That’s the Purple Pledge.
So you have nothing to lose by securing your seats right away because the final price you pay will be the best price you could have paid by waiting.”
This Purple Pledge differs from typical dynamic pricing. The core principle of dynamic pricing is that it fluctuates over time for any tickets for airlines, sports teams, or artists. Prices generally start off relatively high to gauge consumer demand and willingness to pay, typically increase over time, and often have a sharp decrease right before the event to encourage event-goers who are on the fence. There are also three distinct phases of live event ticket purchases — 15% of ticket sales are in “Phase 1”, and 24% of ticket sales are in “Phase 3”, which constitute, on average, the first and last weeks of ticket sales, with Phase 2 lasting several weeks or months (GAO Ticketing Report). As a result, it is almost impossible to properly gauge total event demand until the very end when ticket prices decrease and purchases subsequently increase. All of these phases mean that unless the buyer has a very high willingness to pay, there is an almost guaranteed incentive to wait. However, for the Purple Pledge model, prices will only decrease, and all price decreases are guaranteed to be reimbursed, meaning that there is zero incentive to wait. This model completely removes any of the buyer’s strategic considerations, allowing the model to accurately gauge demand at each ticket price.
This links back to Networks as it effectively captures buyer strategic considerations. Buyers will buy the ticket when it decreases to their personal valuation of the ticket; the worst case scenario is that the cost does not decrease further and they pay their true value. More often, the cost will decrease further, and the buyer will be reimbursed the difference between the ending cost and their true value, resulting in a net value add for the consumer. As a result, bidding your true value is the dominant strategy, and the model will be able to capture buyers’ true value demand at each price.
Additional applications of this model are that it takes back from the secondary market. Ticket brokers on StubHub, SeatGeek, etc. buy tickets at face value and resell them at a much higher price, taking profits away from the primary market and the Northwestern football team. For a big game that is expected to sell out, with the Purple Pricing model, Northwestern can ensure that a game can still sell out at profit-maximizing ticket prices, instead of having tickets sell out at lower prices and get resold for higher prices on secondary markets. This also makes it fairer for consumers, as ticket prices will remain relatively stable, even despite high demand.
Ultimately, Purple Pricing experiments with consumer demand and dynamic pricing, offering an incentive to buy early to accurately gauge demand.
Resources
Inside NU: https://www.insidenu.com/2013/2/15/5906195/inside-purple-pricing-northwesterns-revolutionary-new-way-to-sell
Athletic Business: https://www.athleticbusiness.com/facilities/stadium-arena/article/15142764/northwestern-experiments-with-dutch-auction-ticket-pricing
GAO Ticketing Report: https://www.gao.gov/products/gao-18-347