Thanks to what’s known as revenue management or dynamic pricing, in which costs shift constantly to match demand, top ticket prices for hit shows on Broadway have hit previously unheard-of levels. (Annual Broadway ticket sales reached a record $1.45 billion this season).
Last month the top box-office price for “Hello, Dolly!” was $748. For the phenomenon “Hamilton,” it was $849. Online this week the top price for a performance of “Hello, Dolly!” at several ticket resellers was $1,450. “People have been whipped into a frenzy by the top prices,” said the president of the Disney, producer of the current, dynamically priced hit musicals “The Lion King” and “Aladdin.”
As more transactions shift to the internet, consumers are getting used to a world in which dynamic pricing is increasingly the norm, writes The New York Times (June 9, 2017). We have pretty much accepted it for airline fares; airlines pioneered the concept of revenue management years ago. It has since spread to hotel rooms, sporting events, concerts and designer clothing — and is likely to be used for just about any highly differentiated product where demand may at times far exceed supply. The dynamic pricing algorithm, a software tool that draws on data for millions of past audience members, recommends prices for several different types of performances — peak dates like Christmas, off-peak dates like a weeknight in February, and periods in between.
“At the most basic level, all pricing is about allocating scarce resources,” said the head of optimization sciences at Uber. Surge pricing is another form of dynamic pricing. “I’ve worked in theater, concerts and sports,” he said, “and they all have a similar problem: For extreme hits, demand at what people would consider a reasonable price far exceeds supply.”
Classroom discussion questions:
- Why is revenue management a critical OM tool at airlines and hotels?
- How does the Orlando Magic use dynamic pricing? (Review the video case in Chapter 13).