Fairness as a Constraint on Profit Seeking Evidence from the German Club Concert Industry Hendrik Sonnabend University of Hagen September 28, 2016
Outline Introduction 1 Theory 2 The basic model Demand shock Supply shock Empirical Evidence 3 Descriptive statistics Econometric method and results Conclusion 4 Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 2 / 31
Outline Introduction 1 Theory 2 The basic model Demand shock Supply shock Empirical Evidence 3 Descriptive statistics Econometric method and results Conclusion 4 Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 3 / 31
Anecdotal evidence “Barbra Streisand has canceled a Rome concert that would have launched her European tour [...] . Earlier this month, two consumer activist groups in Italy complained that tour promoters were charging exorbitant prices for tickets to the Rome show. They urged Rome’s city government and Italy’s Olympic Committee to deny permission for the singer to use the stadium. They said prices ranging from 150 euros (101 pounds) to 900 euros (610 pounds) were "absurd and shameful." By comparison, the best seats at Milan’s La Scala opera house run about 200 euros (135 pounds).” [...] Reuters, May 26, 2007 Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 4 / 31
Behavioral pricing Behavioral pricing / Price fairness : Suppliers anticipate customers’ negative reactions to prices perceived as unfair, ... ... and hence have an incentive not to exploit their market power (at least to some extend). Prices keep rigid. Existence first demonstrated in the pioneering study by Kahneman et al. (1986): respondents are asked to judge price patterns "Dual Entitlement": unfair to exploit increased market power ( → reference price), but fair to pass increased costs ( → reference profit) willingness to "punish" unfair pricing behavior This contribution studies the existence of fair pricing in the field using data from the German club concert industry. Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 5 / 31
Behavioral pricing Behavioral pricing / Price fairness : Suppliers anticipate customers’ negative reactions to prices perceived as unfair, ... ... and hence have an incentive not to exploit their market power (at least to some extend). Prices keep rigid. Existence first demonstrated in the pioneering study by Kahneman et al. (1986): respondents are asked to judge price patterns "Dual Entitlement": unfair to exploit increased market power ( → reference price), but fair to pass increased costs ( → reference profit) willingness to "punish" unfair pricing behavior This contribution studies the existence of fair pricing in the field using data from the German club concert industry. Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 5 / 31
Behavioral pricing Behavioral pricing / Price fairness : Suppliers anticipate customers’ negative reactions to prices perceived as unfair, ... ... and hence have an incentive not to exploit their market power (at least to some extend). Prices keep rigid. Existence first demonstrated in the pioneering study by Kahneman et al. (1986): respondents are asked to judge price patterns "Dual Entitlement": unfair to exploit increased market power ( → reference price), but fair to pass increased costs ( → reference profit) willingness to "punish" unfair pricing behavior This contribution studies the existence of fair pricing in the field using data from the German club concert industry. Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 5 / 31
Behavioral pricing Behavioral pricing / Price fairness : Suppliers anticipate customers’ negative reactions to prices perceived as unfair, ... ... and hence have an incentive not to exploit their market power (at least to some extend). Prices keep rigid. Existence first demonstrated in the pioneering study by Kahneman et al. (1986): respondents are asked to judge price patterns "Dual Entitlement": unfair to exploit increased market power ( → reference price), but fair to pass increased costs ( → reference profit) willingness to "punish" unfair pricing behavior This contribution studies the existence of fair pricing in the field using data from the German club concert industry. Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 5 / 31
Behavioral pricing Behavioral pricing / Price fairness : Suppliers anticipate customers’ negative reactions to prices perceived as unfair, ... ... and hence have an incentive not to exploit their market power (at least to some extend). Prices keep rigid. Existence first demonstrated in the pioneering study by Kahneman et al. (1986): respondents are asked to judge price patterns "Dual Entitlement": unfair to exploit increased market power ( → reference price), but fair to pass increased costs ( → reference profit) willingness to "punish" unfair pricing behavior This contribution studies the existence of fair pricing in the field using data from the German club concert industry. Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 5 / 31
Concert industry The concert industry is an appealing candidate: Artists typically face strong incentives for optimal pricing decisions ( → “MP3 crisis”, “recorded music serves to promote live music”). Prices, among other variables, are transparent and easy to observe. “Fans” differ from the standard consumer in that they attach specific value to music (“emotional connection” → expectations, risk of disappointment). Differentiated products and transport costs → pricing power (monopolistic competition) Second-degree price discrimination (self-selection → different seat categories) and third-degree price discrimination (segmentation → different ticket prices among the cities) Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 6 / 31
Concert industry The concert industry is an appealing candidate: Artists typically face strong incentives for optimal pricing decisions ( → “MP3 crisis”, “recorded music serves to promote live music”). Prices, among other variables, are transparent and easy to observe. “Fans” differ from the standard consumer in that they attach specific value to music (“emotional connection” → expectations, risk of disappointment). Differentiated products and transport costs → pricing power (monopolistic competition) Second-degree price discrimination (self-selection → different seat categories) and third-degree price discrimination (segmentation → different ticket prices among the cities) Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 6 / 31
Concert industry The concert industry is an appealing candidate: Artists typically face strong incentives for optimal pricing decisions ( → “MP3 crisis”, “recorded music serves to promote live music”). Prices, among other variables, are transparent and easy to observe. “Fans” differ from the standard consumer in that they attach specific value to music (“emotional connection” → expectations, risk of disappointment). Differentiated products and transport costs → pricing power (monopolistic competition) Second-degree price discrimination (self-selection → different seat categories) and third-degree price discrimination (segmentation → different ticket prices among the cities) Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 6 / 31
Concert industry The concert industry is an appealing candidate: Artists typically face strong incentives for optimal pricing decisions ( → “MP3 crisis”, “recorded music serves to promote live music”). Prices, among other variables, are transparent and easy to observe. “Fans” differ from the standard consumer in that they attach specific value to music (“emotional connection” → expectations, risk of disappointment). Differentiated products and transport costs → pricing power (monopolistic competition) Second-degree price discrimination (self-selection → different seat categories) and third-degree price discrimination (segmentation → different ticket prices among the cities) Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 6 / 31
Concert industry The concert industry is an appealing candidate: Artists typically face strong incentives for optimal pricing decisions ( → “MP3 crisis”, “recorded music serves to promote live music”). Prices, among other variables, are transparent and easy to observe. “Fans” differ from the standard consumer in that they attach specific value to music (“emotional connection” → expectations, risk of disappointment). Differentiated products and transport costs → pricing power (monopolistic competition) Second-degree price discrimination (self-selection → different seat categories) and third-degree price discrimination (segmentation → different ticket prices among the cities) Hendrik Sonnabend (Univ. of Hagen) Fair Ticket Prices September 28, 2016 6 / 31
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