Friday, April 03, 2009

Selling forwards for sporting events | Blogs |

Felix Salmon writing for Reuters has a fascinating look at how the NCAA and other major sporting events could increase their profits based off a pricing model that relies on options and/or forward sales.

Felix Salmon » Blog Archive » Selling forwards for sporting events | Blogs |:
"Preethika Sainam of Indiana University, along with two colleagues from Chapel Hill, has an interesting paper suggesting that sports organizations shouldn’t sell tickets to big sporting events, like the finals of the Final Four, where the teams who will be playing are unknown. Instead, they say, they should sell options to buy tickets at a certain price once it’s known who’s going to be playing. This system, they say, will raise more money in ticket sales, will make fans happier, and will reduce scalping.

The interesting thing is that reading between the lines of the paper, it seems that selling options is actually the second-best solution to these problems. The best solution would be to replace some (but not all) of the tickets with team-specific forwards, which expire worthless if that team doesn’t make the finals. That would allow the “team-oriented” fans to buy forwards rather than tickets which they might not want if their team fails to make it to the finals; it would allow “game-oriented” fans to buy tickets to the finals just like they can right now; it would mean that many more tickets could be sold in total (for the final match-up, you can sell 32 times as many forwards as there are seats)...."
Here is the abstract of the actual paper Consumer Options: Theory and an Empirical Application to a Sports Market by Sainam, Balasubramanian, and Bayus:
"We introduce the concept of consumer options and empirically validate it in the context of event ticket pricing. We demonstrate that consumer options can protect consumers from the downside related to uncertain outcomes, and enhance seller profits by enabling superior market segmentation and increasing consumer willingness to pay. We examine ticket pricing in sports markets where there is uncertainty about the teams that will play in a final event (e.g., the NCAA Final Four basketball tournament). Fans who want to attend the game after knowing which teams will play are often disappointed because tickets typically sell out in advance. We propose that a fan can buy an option on a ticket before this uncertainty is resolved. Later she can decide about exercising the option. We present a simple analytical model of consumer options in this setting. We then empirically demonstrate that profits under options can exceed those from (a) advance selling, and (b) pricing after uncertainty is resolved. Our analysis and findings lay a foundation for future work on consumer options in marketing. "
Think of how many different things could be priced this way! For instance, not sure if you need a rental car or not, plane ticket, hotel room, and even if you want to attend one school or another. Or bandwidth, power, etc. (although correlations make some of these really messy) Wow. Exciting stuff!

Cite: Sainam, Preethika, Balasubramanian, Sridhar and Bayus, Barry L.,Consumer Options: Theory and an Empirical Application to a Sports Market(February 1, 2009). Available at SSRN:

HT to Lura_Forcum for the tweet that alerted me to this.

No comments: