Inelastic Sports Ticket Pricing, Marginal Win Revenue, and Firm Strategy

Abstract

A standard result of firm theory is that a monopoly maximizes profit somewhere along the elastic portion of its demand curve. However, empirical studies of sports ticket pricing routinely find that (home) teams price along the inelastic portion of demand. Despite compelling theoretical explanations of this finding, at least one important factor remains unconsidered. A profit-maximizing team considers not only direct marginal revenue and direct marginal cost when setting a ticket price but also deferred, strategic benefit (revenue) from present game success. Prior literature finds that a) a given win is valued in that it generates additional future revenue and b) likelihood of home victory rises, ceteris paribus, in crowd density. We construct a game in which two opposing teams of a league (with interdependent profit functions) recognize the deferred, strategic benefit of pricing toward (along) the inelastic portion of their respective static demand curves. If the deferred benefit is sufficiently large, a forward-looking, profit-maximizing team prices along the inelastic portion of its static demand curve. Importantly, this same price falls along the elastic portion of the firm’s (empirically unobserved) dynamic demand curve. Lastly, we find that strategic pricing may constitute a Prisoner’s Dilemma (inefficient equilibrium) among opposing teams.