Feb 14, 2013
The Story Behind the New Wildcats Tickets Pricing Scheme
It is fair to say that Sandeep Baliga, a professor of managerial economics and decision sciences at the Kellogg School, and Jeffrey Ely, a professor of economics at Northwestern, do not stop thinking like economists when they leave the office. Last year, Baliga and Ely noticed that the new Chicago restaurant Next was using an innovative ticketing scheme to sell seats at the restaurant. But Next was vastly undercharging patrons for tickets—as evidenced by a hearty resale market—so they proposed on their blog Cheap Talk that the restaurant hold an auction instead. And when they determined that Northwestern could do a better job of selling its Wildcat basketball tickets, they decided to put their ideas into practice.
Up until now, Northwestern has charged the same price for all conference games, regardless of whether or not they are in high demand. Thus, as with Next tickets, a bourgeoning resale market for Wildcat tickets has popped up on sites like Craigslist and StubHub. Baliga and Ely reached out to Mike Polisky, a deputy director of athletics at Northwestern, who agreed to take their advice about how to build a better system.
What Northwestern needed to do, Baliga and Ely decided, was to match ticket prices for individual games to buyers’ willingness to pay. The only problem was that sellers typically have no idea what buyers are willing to pay. “Are they willing to pay a hundred bucks, or are they only willing to pay twenty bucks to go to this game?” asks Baliga. And by setting a single price for each individual game, the university would still only learn what demand was at that one price; it wouldn’t learn anything about what demand would have been had tickets cost a few dollars more or less.
So the first pricing scheme Baliga and Ely considered was to set different prices for more or less desirable tickets at individual games. Want floor seats at the Ohio State game? Fine, but that’s going to cost you. Unfortunately, while this scheme would work fine for games that were likely to sell out, or at least come close, it wouldn’t work for less popular games, where it would be too easy for somebody to sneak from the cheap seats to the pricier ones. So, asks Baliga, what do you do? Hire more staff? Put up barriers? And if you put up barriers, does the fire marshal need to get involved? At a certain point, the pair concluded, it probably isn’t worth it.
No, what they needed was information about the entire “demand curve” for both higher-demand and lower-demand games before setting prices for individual games. Baliga and Ely decided that the athletic department should experiment by auctioning off the tickets to its final two home games of the season—Ohio State and Penn State.
The economists settled on a Dutch auction, where prices start high—the pair used a resale site to determine a good high starting price for each of the two games—and gradually decrease until all of the tickets have been sold. But they added a key idea: fans who purchase tickets at higher prices will then be refunded the difference between what they pay and the lowest winning price. (Auctions on eBay, where the winning bidder pays the second-place bid—that is, the highest losing bid—work similarly, only prices start low and increase from there.) Mark Wesoloski, a director of ticket operations at Northwestern, and Shawn Sullivan, a marketing manager, worked to set up the software and publicize the new scheme—which they called “Purple Pricing”—and its Purple Pledge price guarantee.
So why bother refunding the money instead of using it to line the university’s coffers? Benevolence? Actually, it’s necessary to keep people honest. In a Dutch auction with this refund feature, if a ticket is worth $50 to you, Baliga explains, you’d be stupid to bid $40, because if it goes for $45, you’ve missed out. Had you bid $50, you’d still only have paid $45. In other words, because you will only end up paying the lowest winning price anyway, you have no incentive to bid lower than you are actually willing to pay: it’s in your best interest to be completely honest.
This, of course, is exactly what Baliga and Ely are interested in understanding: the honest price fans are willing to pay. After all, once Northwestern knows the demand curve—the demand for tickets at $50 and $47 and $43—they have the information they need to either maximize profits in the future or, perhaps, to maximize attendance while maintaining some minimum amount of revenue.
And interestingly enough, according to work by Roger Myerson, a former Kellogg School economist now at the University of Chicago, even if information gathering were not the goal of the auction—even if the goal were to maximize profits this time around—the university probably wouldn’t make any more money by locking fans into the prices they originally paid. That’s because, if people knew they’d have to pay exactly what they bid, they’d just on average wait longer and bid lower. Everybody, after all, loves a bargain.
Artwork by Felipe Briceño, a department administrator at the Kellogg School.
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