If You Give Love a Bad Name and adore Bon Jovi, you can pay for Coming up Close. Love Hurts: It’ll cost you to $1750 for a front-row seat, a seat that you can literally take home. People may say you’re crazy, but you’re not the only one:
“It’s probably the biggest negotiation in any tour deal,” said Randy Phillips, the chief executive of AEG Live, promoter of the Bon Jovi tour. “On a hot act you can make as much money from 10 percent of the house as the other 90.”
Some fans will say “You Broke My Heart in Seventeen Places“:
“The artists are just gouging their fan base,” said Terrell Lowe, 49, a brewery sales executive and an avid concertgoer in San Francisco. “The majority of people just can’t afford that.”
Bruce Springsteen doesn’t want fans like Lowe to be left Dancing in the Dark so his tour last year had a maximum ticket price of $98. Is Bruce doing right by his blue collar fans by setting this maximum price?
This is a classic question in monopoly pricing, comparing a price which averages over many types of consumers (a “uniform” price) with price-discrimination. Let’s just look at the welfare of the fans and keep Bruce’s profits out of the calculation – his wealth and his preferences over pricing suggest he’s happy as long as the tour makes more than some lower bound. So consider a move from uniform or near uniform pricing to price discrimination. Some people who were paying $98 before and getting good seats won’t be able to get them for that little any more. If they pay more for roughly the same seat or buy cheaper seats as they can’t afford the high prices, they will be worse off.
But there is another effect. The $98 price is paid by high willingness-to-pay (WTP) and medium-willingness-to-pay consumers. If you the price little lower, you may sell more but you’ll lose margin on the high WTP consumers. So, you keep the price high. With price discrimination, you can charge different prices to the two groups, a high price for the high WTP and a medium price for medium WTP. You can cut the price for medium WTP without hurting your margin on the high WTP as they are buying a different class of seat. (Caveat: you have to set up your pricing/seat quality ratios cleverly to minimize switching between classes!) So, some medium WTP consumers will be better off. They are happy getting slightly worse seats for a lower price.
In fact, this argument applies for all consumers classes that are now pooled at the compressed pricing scheme. If you can fine-tune pricing and target it, some consumers will lose but some will gain. The ones who gain will be price-sensitive so it pays to cut prices to get volume. And price-sensitive consumers are more likely to be low income, precisely the consumers the Boss wants to subsidize.
So, Bruce, do some V.I.P. pricing and give me some free tickets for advising you how to help your neediest fans.