An overseas visitor planning to catch a musical in London and hoping to save money should book their airline ticket long in advance but postpone the purchase of their theatre ticket until the last moment. That is the message of research by Marc Möller and Makoto Watanabe, published in the September 2010 Economic Journal.
The study shows that advance purchase discounts will be employed by sellers whose capacity is relatively small in comparison to demand whereas clearance sales (as in last-minute theatre ticket bargains) are optimal when capacities are large.
Hence differences in the pricing of airline and theatre tickets can be explained by the fact that air travel to London is a relatively tight market while the long-running musicals of London”s West End are very unlikely to be sold out.
The researchers also show that clearance sales are more likely and advance purchase discounts less likely in markets where prices can be committed to in advance, temporal capacity limits are difficult to implement and resale is feasible. These results provide further reasons for the observed differences in pricing between airlines and theatres.
So when should an overseas visitor book their trip to London? In a separate study, for which the results are yet to be confirmed, Makoto Watanabe finds evidence that airfares are lowest around eight weeks before the travel date.
Moreover, according to the as yet unpublished research, it seems that tickets are cheaper when purchased in the afternoon rather than in the morning. It may be that airlines price discriminate between business travellers who book their tickets at work and leisure travellers who book from home.
Why do airline tickets become more expensive as the travel date approaches whereas theatre tickets are sold at half price in Leicester Square on the day of the performance?
The study published in the Economic Journal considers the pricing of products that can be purchased in advance, that is, long before their actual date of consumption. Further examples include seasonal products like the newest skiing equipment or entry slots for marathons.
The researchers identify two key determinants of the optimal pricing schedule:
- On the one hand, when purchasing early, consumers face uncertainty with respect their own future demands. When booking a flight to London weeks ahead, buyers have to take account of the possibility of unforeseen events that will make their trip impossible. To make consumers take their chances, airlines have to offer advance purchase discounts. As a consequence, ticket prices increase as the travel date approaches.
- On the other hand, when purchasing late, consumers face the risk of being rationed. When purchasing a theatre ticket last minute, there is a possibility that the event will be sold out. To make consumers bear this risk, theatres implement a clearance sale by offering last minute discounts. As a consequence, ticket prices decrease on the day of the performance.
The optimal dynamic pricing strategy depends on the interplay between individual demand uncertainty and rationing risks. In turn, rationing risks depend on a comparison of demand and supply and hence on the seller”s capacity. Differences in dynamic pricing can therefore be explained by differences in capacities.
”Advance Purchase Discounts versus Clearance Sales” by Marc Möller and Makoto Watanabe is published in the September 2010 issue of the Economic Journal. View Article
Marc Möller
Universidad Carlos III de Madrid | marc.moeller@vwi.unibe.ch
Makoto Watanabe
Universidad Carlos III de Madrid | makoto.wtnb@gmail.com
