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Reader Question: So What’s Up With This Strasburg Kid?

June 8th, 2010 · 14 Comments
Behavioral Econ · Buyer Beware · Reader Questions · Sports

Okay, so maybe that wasn’t the exact wording of the question, but it’s what everyone seems to be asking nowadays…reader Seth writes:

I had a topic for you to address that I thought might be good for someone with a behavioral econ background. Tonight is Stephen Strasburg’s MLB debut (#1 uber prospect) for the Nationals. The Nationals will only let you buy tickets for tonight if you buy tickets to 3 other games during the season. You do get one of those games free, plus a Nats hat. Why don’t the Nats just raise their prices for tonight’s game? My guess is that people hate price increases, but I thought I would see if you have some research to back that up or other ideas?

In case you aren’t familiar, Stephen Strasburg is supposedly going to be the savior of the Washington Nationals baseball franchise, and his ability to accurate place a 100 mph fastball has basically made him the Justin Bieber of minor league baseball. (Translation: He is inexplicably popular with the tween set.) From the linked article:

Tonight baseball’s most eagerly awaited rookie plays his first major league game, pitching for the Washington Nationals at home against the Pittsburgh Pirates. The game is expected to draw the largest crowd of the year for the D.C.-based Nationals.

The Strasburg phenomenon extends beyond baseball. He’s been a one-man economic stimulus plan everywhere he has gone.

Drawing unprecedented crowds for the Nationals’ minor league teams in Harrisburg, Pa., and Syracuse, N.Y. Strasberg has set more than just pitching records. And even as he played in the minors, Strasburg’s #37 jersey became one of the top-selling jerseys in Washington at Nationals Park.

His autograph fetches nearly $200 on eBay and his one-of-kind rookie baseball card just sold for more than $16,000, which is also more than most Babe Ruth cards.

The Nationals paid $15 million to sign Strasburg after he graduated from San Diego State University last year. It was an unprecedented amount for an amateur baseball prospect.

Well then. Back to the matter at hand, this is roughly what seems to be going on:

The supply of tickets to Nationals games is essentially fixed, at least in the short run, simply due to the fact that there’s a given number of seats in the stadium. You will notice that I marked the price at which the games would sell out (where supply and demand intersect, if you will go with my simplifying assumption that there can be one representative price for the tickets), but since Nationals games don’t typically sell out, the actual price charged is higher than this price. (In economic terms, there is a surplus of tickets.)

But wait- doesn’t economic theory state that the surplus will bid down the price until demand meets supply? Sometimes. It’s important to remember that supply and demand models represent competitive markets, and the Washington Nationals don’t operate in a perfectly competitive market. Sure, they get some competition for customers from the Baltimore Orioles (no sarcasm, I swear), but they more or less have a monopoly on baseball entertainment in the Washington D.C. area. (It’s not like I can decide that I want to start a competing team next door, so there are pretty significant barriers to entry present.) Given this monopoly power, coupled with the fact that the vast majority of the Nationals’ costs are fixed and don’t depend on the number of seats filled, it’s reasonable to assume that the organization’s goal is to set the ticket prices to maximize revenue. The revenue-maximizing ticket price in turn depends on how price sensitive (read elastic) consumers are, and you can see a little video on the topic here. The bottom line is that it is entirely possible that the organization brings in more money by keeping prices higher and leaving seats unfilled than it would by lowering the price just to sell out games.

But I digress, since the above discussion doesn’t directly address the impact of Strasburg on ticket prices. Luckily, that explanation is simple- that kid is cool, and people really want to see him. Regardless of whether markets are competitive or not, increased demand leads to higher prices. But Seth points out that the Nationals are being a bit sneaky- they aren’t explicitly raising the ticket prices for the popular game, but they are bundling it with other items. I can’t be sure of what their reasoning is, but my hypothesis is something along the lines of the following: like I said, the marginal cost of one more person at the ballpark is essentially zero since there are a fixed number of seats. (The opportunity cost of the bundled tickets is also zero since the tickets would likely go unsold otherwise.) In addition, once a person is at the ballpark there is a chance that he will buy the $8 draft beers, the $6 cheeseburgers or, if you’re in Boston at least, the $4 Dunkin Donuts iced coffee. These two facts together imply that there is an incentive to get butts in the seats, in which case the bundling strategy is clearly superior to just raising prices. I think that there is also some merit to what you posited from the consumer side- consumers probably get less upset about paying more if they feel like they are getting more, regardless of whether they would have actually paid for the extra items in the first place. (There’s also some non-zero option value in having the other tickets lying around.)

If the organization were to simply raise prices in response to the increased demand, it would probably be on the receiving end of claims regarding price gouging and other opportunistic behavior. I am not clear on what Washington D.C.’s laws are regarding price gauging, and in many states the laws specifically refer to crisis situations, but increases in price without a corresponding increase in cost (and no, the $15 million they are paying the kid doesn’t count here) tend to create sticky situations from a PR and future sales perspective even if they are not specifically problematic from a legal perspective.

Since you asked specifically about research to support this, I will point you to Kahneman, Knetsch and Thaler’s paper Fairness as a Constraint on Profit Seeking: Entitlements in the Market. You can see at the very beginning of the paper that consumers judge as unfair price increases that are not accompanied by a cost increase. (The authors show, for example, that 82 percent of people surveyed think it would be unfair for a shopkeeper to raise the price of snow shovels from $15 to $20 during a snowstorm. See also questions 14 and 15 for similar examples.) If consumers shy away from transactions that they deem to be unfair, then companies certainly have an incentive to take into account the ethical perceptions of their business decisions even if they don’t care about fairness for the sake of fairness.

I feel like, once again, I fall on the econ rather than the human end of the spectrum, since I recall a similar situation where the Atlanta Braves tried to sell me a bundle of tickets, one set of which was for a game against the Red Sox and 3 sets of which were for games that I neither cared about nor would be in town for, and it really irked me that I couldn’t just pay more to go to the high-demand game without having to feel like an ass for buying something that I had no chance of using. (It further irked me that the tickets to the Red Sox game were standing room only.)

At the very least, this Strasburg kid appears to be earning his $15 million, and he hasn’t even thrown a single pitch yet. Now that’s efficiency.

If you are curious, Seth’s take on the matter can be found here.

P.S. Apparently Alan Greenspan and Ben Bernanke disagree over the possibility of a Strasburg bubble:

Alan Greenspan, 84, former chairman of the Federal Reserve and a Nationals fan, compares Strasburg to Bob Feller, the Hall of Famer who dominated with a 100-mph fastball from the time he broke in with the Cleveland Indians in 1936 as a 17-year-old.

“Every young baseball fan knew that Feller was from Van Meter, Iowa,” Greenspan says. “Feller went on to pitch three no-hitters and struck out more than 2,500. Will Stephen Strasburg match his celebrated predecessor? One can only hope.”

Ben Bernanke, 56, the current chairman of the Federal Reserve and also a regular at Nationals games, says he learned from Greenspan about “irrational exuberance. That applies here. We need to allow Strasburg to acclimate himself. But he’s certainly been successful at every step along the way.”

Two words: Daisuke Matsuzaka.

Tags: Behavioral Econ · Buyer Beware · Reader Questions · Sports

14 responses so far ↓

  • 1 Arstal // Jun 8, 2010 at 5:21 pm

    I’ll still take Heyward over him.

  • 2 walt526 // Jun 8, 2010 at 5:22 pm

    Yeah, the reasons why the Nats would rather have people buy seats to future games rather than raise the price on the single game is do to concessions. It’s actually a little more complicated: in MLB, teams have to split gate revenues with the visiting team (it’s something like 60/40 or 70/30), but they get to keep 100% of the revenues on concessions and merchandise.

    So let’s say that the Nats were to double the price of the ticket. The Pirates would get 30 or 40% of that revenue. Obviously, some guy with an elaborate spreadsheet (maybe even an economist) has figured out that they come out ahead by getting people to buy extra tickets (even if one is free), even if more than half never get used because their profit margin on concessions and merchandise is absurdly high and they can keep all of that for themselves.

  • 3 Mitch // Jun 8, 2010 at 9:47 pm

    I completely agree with you hypothesis on the reason for bundling. It seems like the Nats have a good grasp on the concepts of loss aversion and the endowment effect and are using them to increase revenue.

    Even though the fans did not intend to go to the non-Strasburg games, now that they have spent money and have the tickets, they are likely feel as if they are losing/wasting money by not going to the games. And since they will treat the extra games as any other game they planned on going to, they are likely to spend the same amount on concessions.

  • 4 Lumpy // Jun 9, 2010 at 10:37 am

    Indeed with Dice-K. You should do a post on the retrospective economics of Dice-K. Did the Sox get their money’s worth even though he was an on-the-field bust past his first season? His marketing and press value was certainly factored in (just like Strasburg).

  • 5 Nudge blog · Stephen Strasburg is worth his $15 million // Jun 9, 2010 at 11:03 am

    […] Jodi Beggs (before his spectacular debut last night). She also notes that the Washington Nationals tried to […]

  • 6 Seth // Jun 9, 2010 at 11:05 am

    Thanks for the post! I should have thought of all the concessions people would buy when they went to the game. Seems like a similar thing happens with tickets to concerts.

    The announced attendance last night was just under a sellout, so looks like they did their strategy well.

  • 7 econgirl // Jun 9, 2010 at 1:56 pm

    Two follow-up points, in no particular order of importance:

    1. Tony Cookson also weighs in on the issue over at This Young Economist:

    http://blog.thisyoungeconomist.com/2010/06/price-discrimination-everywhere.html

    2. 14 K’s and no walks in 7 innings? Am I reading that right????

  • 8 Matt H. // Jun 9, 2010 at 2:07 pm

    Strasburg is a complete organization changer especially from an economics perspective. We’ve seen pitchers do well and go bust before, but he just looked effortless last night throwing a pitch count in the 80s and striking out 14.
    Then there’s the economics: jersey sales, sell-outs and concession sales on days he pitches will skyrocket. But then, as his win total piles up, the Nationals also improve their standing in the NL East, which attracts more fans on days he doesn’t even pitch.

  • 9 econgirl // Jun 9, 2010 at 6:44 pm

    He already seems to be helping out the Cleveland Indians as well:

    http://sports.espn.go.com/mlb/news/story?id=5267868

  • 10 Pat // Jun 9, 2010 at 8:56 pm

    There’s another potential aspect to their pricing scheme: to discourage Strasburg-only fans to buy tickets. This strategy is currently used in at least one NFL market. The Minnesota Vikings and Green Bay Packers are huge rivals, and the cities are only 279 miles from each other. Both cities host the other team annually. Green Bay bands its home game against the Vikings with the games against the three “worst” visiting teams. This effectively puts large externalities against Vikings fans, who don’t want to watch the Packers, per se, and also won’t go to the game for the hell of it to see Drew Brees or one of the Mannings. Packers fans would be more likely to want to go to these other games, hopefully to see the Packers trounce the crappy teams. The end result of this is that the home field advantage is enhanced at the Vikings’ game with fewer Vikings’ fans.

    Perhaps the Orioles should do this for Red Sox games.

  • 11 Denis // Jun 13, 2010 at 9:59 pm

    I would argue that the Nationals (or any sport team) DO in fact operate in a competitive market. While there may not be significant competition from other MLB teams (or even minor league baseball), there are countless other entertainment options available to the consumer, especially in the Washington DC area. Yes, demand may be slightly more inelastic for the die-hard fan, but then if unhappy with the price, the die-hard fan could still opt to not attend the game but rather watch it on TV, at home, on an HD TV with cheaper beer and no parking hassle. 🙂

    And Walt brought up just the point I would have made about ticket pricing. Generally in sport tickets are considered somewhat of a loss-leader. A lot of research I’ve read seems to indicate that teams don’t price tickets to maximize profit. Instead, as Walt mentions, that comes from the ancillary revenues such as parking, concessions, and souvenirs.

    Sad, though, that most people assume simple market functions to be price gouging.

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