May 30, 2007

The Big Picture

Dynamic Pricing

by David Pinto

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At first glance, baseball and retail energy markets appear to have nothing in common. Yes, baseball buys electricity to light the parks and run the stadium, but how does buying a ticket relate to buying a kilowatt hour?

There actually is a relationship. Digital technology lowers the barrier to knowledge, allowing us to answer questions better and faster. Twenty years ago, we might be able to find out a score on CompuServe that was an inning old. Today, we not only know the current count, we know what kind of pitch was thrown, the location, and the speed. A hitter finishes an at-bat, and we see his new averages. A pitcher completes an inning, and his ERA appears before us.

Lynne Kiesling and Michael Giberson write Knowledge Problem, an economics blog concerned with energy markets. Dr. Kiesling visits the idea of dynamic pricing of retail electricity quite often in her writings. Give customers up-to-the-minute pricing data on electric rates, and they use electricity more efficiently. Give them technology that controls appliances, and they do even better. For example, here she discusses the combination of technology, pricing, and entrepreneurship:

I would only add two points to [an] articulation of the benefits of dynamic pricing and digital metering. The technology can't create all of these benefits on its own: rate redesign to allow dynamic pricing is imperative. What good is having technology to enable responsive demand if the meter just gets the same old, same old averaged price signal? Not much. Digital technology and dynamic pricing are symbiotic. Furthermore, the most significant benefits of digital technology and dynamic pricing are largely unseen by us in advance, which is why it's so bloody hard to get them enacted in regulation!

The most substantial benefits of the retail competition that technology plus pricing enable come from product differentiation and innovation in the products and services available to customers. Think about telecom: we got some benefit from the reduction in prices for long-distance service, but the real value proposition has been in the proliferation of new products and services that have transformed our lives. There are entrepreneurs out there thinking about ways to do that in electric power retail service, and the potential exists, if we will but let it happen.

As I absorbed these concepts, I started to wonder if dynamic pricing could be applied to baseball. One use came to mind while standing in line for a hot dog at the ballpark a couple of years ago. For me, missing an inning to get food is a big deal. I'll find the shortest line just so I won't miss much of the game. It struck me that real-time pricing signals could help here.

I was overjoyed to see Lewis Wolff thinking along the same lines:

Oakland fans will be able to buy tickets with their cell phones, enter the park by swiping a bar code that will be sent electronically to the cell phone, and upgrade to better seats on game day if they wish through the cell phone. The A's say they will be able to monitor food quantities digitally and if, say, there's a surplus of hot dogs on a given night, they'll be able to react by instantly lowering the prices during the game, and informing the fans via digital signs that will be installed throughout the stadium.

Wolff recognizes the two areas where dynamic pricing can add revenue to the team's bottom line--tickets and concessions. Dynamically lowering food prices helps eliminate waste. The opposite works also--if a shortage of pizza occurs, a higher price keeps a stand from running out, so fans who absolutely positively must buy a slice or pepperoni can do so.

Along with the prices, why not supply real-time information on waiting time? If cell phones can receive ticket upgrade information, why not a map of the concession area showing line lengths? Fans could even order from their phones, with the food delivered for a premium, or picked up for cost. The technology plus entrepreneurship Kiesling describes might change our whole ballpark experience.

The dynamic ticket pricing example shows how teams can capture revenue with these systems. Fans are in the park, but there are expensive seats unsold. In the dynamic pricing scheme, clubs offer an upgrade for half the difference between the ticket the fan bought and the pricier seat. Loge moves to the boxes, grandstand moves to the loge, bleachers move to the grandstand, and standing room gets a seat. The fans get a better seat at a cheaper price, and the team earns more money than if fans just randomly move into vacant seats.

And there's even more money to be captured from popular games. Right now on Ebay, Red Sox/Yankees tickets for their early June matchup are selling for up to nine times face value. Even in a place with poor attendance like Kansas City, the St. Louis series generates premium prices on bidding sites. Teams could capture that premium revenue by creating a market for their seats. A ticket is analogous to a futures contract, after all; why not trade them instead of selling them? The teams could make their own markets, and even capture the transaction fees involved with each sale. Right now, ticket brokers and even individual fans benefit from these trades. Teams should find a way to tap into this revenue stream.

Even in years when a team is not popular, the lower price associated with that lack of popularity should bring more people to the park. Teams then capture the upgrade money and the concession money. Dynamic pricing gives teams the potential to bring in revenue where none existed before. (Note that dynamic ticket pricing requires the repeal of anti-scalping laws where they exist.)

In the digital age, knowledge not only becomes easier to obtain, but more speedily obtained as well. With data transfer infrastructure in place, new products can not only enhance the ballpark experience for fans, but allow teams to capture revenue streams that previously went to waste. Whether at the electric outlet or the concession stand, dynamic pricing holds the power to lower costs for customers (fans) and increase revenue for suppliers (teams), a winning strategy for all.