Should Dynamic Pricing be Allowed?

Fang Lingyi, Wan Junccheng, Guo Xinyu, Lui Yike, He Yuejin – Wuhan Britain-China School

Dynamic pricing is a dominant mechanism in mega events pricing strategies, which is the price of a product varies with the level of demand. However, fans often complain that tickets price soaring, while lots of loyal supporters are priced out by severe budget pressure. If public backlash is so severe, why does dynamic pricing remain ubiquitous? Evaluating both sides to reach a surprising conclusion.

Would the market's problems be solved if we did not use dynamic pricing but fixed price instead?

The following chart shows the specific market conditions in this situation:

Figure1.1: Source: Authors’ elaboration

In his studies of the ticketing market(Krueger 2019) , Krueger pointed out that, in order to maintain fan loyalty, artists often set ticket prices 20% to 30% below the market-clearing price. This creates a price gap between Pc and P*. If fans successfully get concert tickets, will they choose to attend the concert or resell the tickets at the market price?

It may seem reasonable to assume that fans are so passionate about their idols that they would rather attend the concert themselves than resell their tickets. However, the reality can be quite different. Consumers who obtain tickets at a low price may have lower disposable income, making the price gap more attractive to them. As a result, they may choose to resell their tickets, regardless of how loyal they are to the artist.

Scalpers will also be attracted by this large price gap. For instance, the rapper ASEN held a thank-you concert in his hometown of Enshi. The tickets were priced at only 0.1 yuan, with 400 tickets available in total. According to statistics, 300 of them were bought by scalpers, and the resale price was once pushed up to 1,000 yuan.

Those consumers who complain about increasingly high ticket prices still cannot buy the low-priced tickets. Meanwhile, consumers who manage to get these tickets may choose to resell them instead. Therefore, even without dynamic pricing, the final transaction price of tickets may still be close to the market-clearing price. A fixed price cannot eliminate the market-clearing price; it simply shifts the price adjustment from the primary market to the secondary market.

However, although dynamic pricing is consistent with fixed pricing, dynamic pricing also has significant advantages. At fixed pricing, huge rent-seeking costs - that is, non production inputs, arise from ordinary fans' ticket grabbing or scalpers' scalping. This part is also deadweight loss, that is, there is no surplus input from consumers or producers. However, in dynamic pricing, all the above parts are recovered as producer surplus, which has achieved a major goal of the market economy: to maximize the total welfare. Furthermore, concerts are commodities with extremely high sunk costs. When the producer's income increases, the excess return will stimulate the creative enthusiasm and cross period investment of artists and behind the scenes teams.

Figure 1.2 and 1.3 The Welfare Difference Between Dynamic and Fixed Pricing(Source: Authors’ elaboration)

In addition, dynamic pricing is not blindly raising the price. In the case of pricing errors that cause the price to be higher than the market clearing price, the price will also be lowered to avoid empty seats. The reduction of unnecessary losses caused by idle resources and empty seats actually realizes the Pareto optimality of the static dimension - that is, no one can become better without letting throwing people get worse.

Dynamic pricing can improve allocative efficiency and achieve total welfare maximization, but this depends on willingness to pay accurately reflecting consumers’ true valuation of tickets. Income inequality may weaken this relationship.

As dynamic prices rise with demand, high-income consumers not only have a stronger ability to pay, but may also have a higher willingness to pay because of their lower marginal utility of income, ceteris paribus. This means that WTP does not fully reflect consumers’ preferences for the concert itself, while high-income consumers have a greater chance of getting tickets.

Among those who get the tickets, some may be less loyal fans. They may attend for social reasons or simply for the experience, replacing more loyal fans who have lower purchasing power.

This raises the first problem: a decline in total utility.

Take a concert as an example. A concert is not an ordinary good, but an experience good jointly created by consumers and producers. As consumers, fans contribute to the atmosphere through their cheering and interaction with the artist, which also adds to the quality and economic value of the concert. The participation of both artists and fans is therefore important to the utility consumers receive. (Becker, 1991)

When less loyal but wealthier consumers enter the market, overall participation may fall, reducing the utility received by everyone and creating more negative peer externalities. Therefore, dynamic pricing overlooks consumers’ contribution to the value of the product: it excludes some loyal fans and replaces them with wealthier but less engaged consumers, leading to lower total utility and, therefore, lower total welfare.

So, to conclude, the problem of dynamic pricing is not simply price. Pure price restrictions cannot prevent black market reselling, and pure dynamic prices will cause utility mismatch. But in any case, the benefits of dynamic pricing can not be ignored, it has extremely high economic efficiency, low deadweight losses.

The true problem is not loyal fans can not afford tickets, actually it is affordable for everyone except who is absolutely poverty. The real problem is wealthy people overwhelm loyal fans on willingness to pay with a very low disutility of spending.(Dworczak, Kominers, and Akbarpour 2021) We propose that the way to solve this dilemma is to introduce nonmonetary competition,  and the mechanism designer should require participants to make nonmonetary efforts, such as song listening time, participating in the community, etc., in order to induce real preferences to be revealed. The costly ordeal for loyal fans is almost zero, opposite for less loyal ones. Thus the most loyal fans can have the right to compete symmetrically with the rich. Thus, the dynamic pricing mechanism utilitarian social welfare.

Bibliography

Krueger, Alan B. 2019. Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us about Economics and Life. First edition. New York: Currency.

嘻笑堂. 2023. "大离谱！Rapper创造史上最低票价！0.1元但居然被黄牛抢光！" 知乎专栏，3月5日. https://zhuanlan.zhihu.com/p/611482945.Xixiaotang. 2023. “Outrageous! Rapper Sets the Lowest Ticket Price in History! 0.1 Yuan, Yet Scalpers Snapped Them All Up!” Zhihu Column (blog), March 5. https://zhuanlan.zhihu.com/p/611482945.

Happel, Stephen K., and Marianne M. Jennings. "The Folly of Anti-Scalping Laws." Cato Journal 15, no. 1 (1995): 65–80.

Becker, Gary S. 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price." Journal of Political Economy 99 (5): 1109–1116. https://doi.org/10.1086/261791.

Akerlof, George A., and Rachel E. Kranton. 2000. "Economics and Identity." Quarterly Journal of Economics 115 (3): 715–753. https://doi.org/10.1162/003355300554881.