Dynamic Pricing for Tickets Displays the Power of Prices

Broadway and Airlines

by Elaine Schwartz    •    Nov 26, 2011    •    896 Views

Have you ever hesitated to book an airline reservation and, within moments, the price changed? Or, could you have known that delaying your purchase of a ticket to God of Carnage in LA last summer would have saved you almost $70?

The reason is “dynamic pricing.” Airlines do it, hotels also, and now theater owners.

According to the NY Times, Broadway theater owners are using dynamic pricing to cater to the “haves” and “have-lesses.” For airlines, that has meant vacationers paying much less than business travelers. Even for certain restaurants, you could pay more for Saturday evening at 8:00 than Tuesday at 9:30. With the LA example, early ticket purchasers spent $120 but when demand plunged, the price did also.

With dynamic pricing a seat is not just a seat. It becomes a commodity that has to be used when available because you cannot store it. Its customers have different needs, its future demand is uncertain, and its providers have pricing power. Implemented appropriately, dynamic pricing maximizes revenue.

The Economic Lesson

Dynamic pricing is all about price elasticity of demand. If price changes a lot and the quantity we buy remains almost the same, as with medication, then our demand is inelastic. By contrast, if price swings have a big impact on buying, then our response is elastic. With Broadway shows and airline seats, certain consumers have an elastic response to higher prices; when price ascends they say, “No.” Others, the inelastic group, will buy no matter what.

An Economic Question: Thinking of “dynamic pricing,” we could say that we have 2 demand curves among Broadway theater ticket buyers. Explain and draw.

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