Should you pay more to see a blockbuster film during the Christmas holidays when movie going peaks? Less for an obscure foreign film? More on Saturday and at 7 pm? Less on Tuesday and 11 am?
The issue is variable pricing. In this paper, several researchers suggest that “one price fits all” no longer makes sense for movie tickets. Their ideas are discussed here in an Atlantic article with several fascinating graphs about our movie going habits.
And, here (Israeli congestion pricing), here (baseball games and airlines), here (a Chicago restaurant) and here (Broadway tickets), econlife.com looks at variable pricing elsewhere.
Our bottom line: Now that we have the technological capability to variably price, should we?
The Economic Lesson
Variable or 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 movie tickets, certain consumers have an elastic response to lower prices; when price descends they see many more films. Meanwhile, others whose demand is inelastic respond minimally to price changes. Awareness of price elasticity of demand could generate more revenue for movie theaters and savings for consumers.
An Economic Question: Depending on the movie, the time, the day and the season, how would higher and lower prices affect people with elastic demand? Inelastic demand?
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.
A tank of gas is not just a tank of gas.
Isn’t it a spending decision? The national average for a gallon of regular is close to $3.88 and higher in California. July 2008 was the last time we dealt with 4 dollar gas. One economist estimated that 4 dollar gas cuts our discretionary income by 5%. That means less to spend on meals, vacations, clothing, and furniture.
Also, a tank of gas represents much more than crude oil. If you imagined the price of gas as a pie, then a 68% slice is for the oil. Add in 12% for taxes, 7% for marketing and distribution, 13% for refining and you get the 4 dollar total.
What else can an expensive tank of gas mean? With higher gas prices, AAA emergency gas deliveries to stranded motorists are soaring. Higher gas prices could lead to .5% less GDP growth. And, President Obama’s popularity is affected by gas prices.
The U.S. Energy Information Administration website has great stats about any gas fact you need. Also, you might enjoy looking at this Washington Post poll about how high gas prices have to go before we drive less.
The Economic Lesson
Gas provides perfect examples for econ vocabulary. With the price of a gallon of regular gas close to $4.00, the opportunity cost of running on empty has diminished. 4.00 gas also affects our discretionary spending. And, of course, it all starts with elasticity. At what price will we buy less gas? Many have said that $5.00 is the point at which our inelastic demand becomes elastic.
According to one recent news article, a Cadbury chocolate bar is missing 2 chunks but the price is the same.
First we had a hedge fund trying to corner the cocoa bean market. Then came political turmoil in the world’s leading cocoa producer, the Ivory Coast. The result was the price of cocoa beans touching a 32-year high. Combine that with the rising price of sugar and you get either a smaller chocolate bar or one that is more expensive.
With chocolate added to our list of soaring commodity prices, we can see that on the supply side, the reasons for soaring prices have varied. But, on the demand side, the response has been similar.
The Economic Lesson
For certain items, we buy much less when price rises and much more when it falls. At other times, our quantity demanded remains relatively stable, no matter where price goes.
How we respond to a price change is called our price elasticity of demand. More technically, demand elasticity compares the proportional change in quantity demanded to the proportional change in price. We tend to display much greater demand elasticity for luxury goods than for necessities.
Is chocolate a necessity?
Which would you choose?
2000 calories from 10 donuts that would cost you $5?
2000 calories from Greek yogurt, organic raspberries, a turkey avocado wrap, Alaskan King Salmon, green beans, a whole wheat roll, strawberries and heavy cream for $25.86?
Marketplace.org presented the $5/$25.86 comparison to show us that healthy food is expensive. Predictable? Yes. Then though, they told us something we would not have expected. This takes us to a recent academic study.
University of Buffalo researchers discovered that when healthy food became cheaper, consumers used their savings to buy less expensive less healthy food. As a result, the overall nutritional value of their diet remained the same. However, when Ritz Bits Peanut Butter Sandwich Crackers, for example, became more expensive by 12.5% to 25%, consumers stopped buying them. Then, with their savings, they purchased healthier alternatives, like bananas.
The implications for public policy? Tax junk food if you want people’s diets to improve.
The Economic lesson
But isn’t it even more complicated? Aren’t we talking about targeting the elastic region of many different consumers’ demand curves? The elastic region is where price rises and total expenditures (TE) drop.
You might want to look back at the soda tax debate.