Eller Research on Contingency Pricing in Capacity-Limited Markets with Diverse Consumer Preferences to be Published in International Journal of Research in Marketing
A new study out of the University of Arizona Eller College of Management titled Winning Seats: Contingency Pricing in Capacity-Limited Markets with Diverse Consumer Preferences is set to be published in the International Journal of Research in Marketing.
The paper is based on faculty research of sports marketing and event pricing. It is co-authored by Bikram Ghosh, associate professor of marketing and Eller Faculty Fellow, former Eller PhD student, Peng Wang who is now assistant professor in marketing at Tianjin University, College of Management and Economics, and Yong Liu, professor in marketing, HSLopez Family Endowed Chair and director of the HSLopez School of Business Analytics.
The paper examines an emerging pricing model, contingency selling, for markets where the product is sold in advance with attribute uncertainty and capacity constraint. This is the first study that formally examines the merits (and limitations) of contingency selling, an idea that has been experimented within the industry.
An example is tournament ticket sales for sports events, where it is uncertain whether a particular team will appear in the game. The model enables the firm to sell tickets in a contingent fashion. For example, some tickets will be valid only if a certain team gets into the game.
When consumers (fans) have sufficiently different preferences for different products (games with different teams), selling these “contingent tickets” better matches the price with the willingness-to-pay of particular consumer segments (fans of specific teams).
“In this study, we show that contingency selling continues to be advantageous in the presence of secondary markets where consumers purchase tickets in advance but can trade tickets (using Nash bargaining) once they know which team will be in the game,” says Ghosh. “We also extend our model to examine the impacts of consumer optimism bias and fan base asymmetry. Finally, we compare contingency selling to several alternative selling mechanisms.”
Further points and summation in the study include:
- Analysis of the practice of contingency selling in the context of sports markets where consumers face uncertainty about the product and there is a service capacity constraint.
- Examination of its properties in comparison with the traditional approach of selling tickets and show that contingency selling is able to extract (higher) rent for each seat through interstate price discrimination.
- By decoupling different states, contingency selling enables the firm to sell each state to the right kind of consumers, i.e., the consumers who have a stronger preference for a particular team and/or have a stronger belief in the team’s chance of advancing to the game. Contingent tickets essentially enable the firm to sell every single seat to multiple consumers. This effect becomes more pronounced when service capacity is more limited.
“Our model integrates the literature on advance selling and ticket pricing by considering the impacts of product uncertainty, capacity constraints, and consumer heterogeneity, as well as secondary markets and several different pricing mechanisms for ticket sales. Our model provides valuable guidance on the nascent practice of contingency selling for sports leagues and event organizers,” says Wang.