Economic price theory suggests that optimal prices are achieved where supply and demand are evenly matched. The theory follows that, when there is an excess supply, prices should decline to a level which stimulates sufficient demand to consume the excess supply. Conversely, when supply is tight, prices should rise to a level where demand is satiated. When applied to ticket pricing by Major League Baseball teams, the task involves a measure of preseason judgment to estimate demand at various price levels vs. a finite supply. The 2009 pricing policies of the New York Yankees, Boston Red Sox, and New York Mets represent three very different approaches to the issue.
The Yankees took a course that bifurcated its ticket pricing between premium seats and non-premium seats. The premium seat policy involved per ticket prices of between $500-2,600. Their view was predicated on several key facts and assumptions:
• The quality of the Yankees’ teams makes their games a high demand event. To make sure of this, the Yankees spent heavily in the recent off-season on high priced pitchers and a slugger. The plan was to have great players to stimulate demand which would allow them to largely fill their stadium regardless of the opponent.
• The Yankees were building a new $1 billion plus stadium which they had to finance
• A finite number of premium seats with deluxe services would be attractive to corporations, hedge funds and New York’s plethora of big spending plutocrats
• The new Yankee Stadium, with reduced seating capacity and dramatically improved amenities, would enhance already strong demand
• The Yankees believed that “Scalper” prices at the old stadium were a strong reflection of the supply demand dynamic for premium Yankee tickets. Scalper pricing suggested a large divergence between prices paid for field level seats and those in less desirable locations. In many instances scalpers were attaining four figure prices per seat for top locations in the larger older stadium. A corollary was that scalper pricing pointed to an ability to raise non-premium prices, albeit at a lesser percentage increase than for premium seats (i.e. up 10-50% vs. 500%)
• By raising prices, the Yankees believed that they could disintermediate scalpers, achieve optimal pricing and generate significantly more revenue than in prior years.
The Yankees’ theory had merit. The scalpers’ pricing differential to face price, with 100%+ mark ups, suggested the potential for more efficient pricing. The challenge was making the right pricing decisions and factoring in the adverse economic developments occurring at the time of the Yankees annual early October exit from World Series contention.
The Red Sox’ approach to optimal pricing was dissimilar due to differing facts and strategies:
• They did not have a new stadium to finance and their payroll is significantly less than that of the Yankees and about $30 million less than it was in 2008
• The Red Sox have sold out every home game since mid-2003 despite raising prices annually to what, by 2008, were then the highest priced tickets in Major League Baseball.
• They did not have a significant base of large corporate season ticket holders. Rather, they rely on individuals, small businesses and ticket brokers for the majority of their season ticket sales. Such season ticket holders could be considered to be more economically sensitive than the likes of Citicorp, Lehman Brothers, and Bear Stearns who the Yankees were counting on!
• Because the Red Sox played much deeper into the playoffs in 2008 (the Yankees did not make it at all), they were forced to start their 2009 ticket pricing deliberations at later date. This had the benefit of giving them more economic market input to influence their price thinking
• Scalper prices indicated that 50-100% premiums were being achieved in 2008. This might have provided impetus for a price increase, however, unlike the Yankees situation; there was no new stadium, no major increase in amenities nor a decrease in the supply of seats. More important, those scalper prices reflected pre-crash demand.
The Red Sox approach, which was rolled out in December, was to keep prices at 2008 levels. Flat prices were marketed as a fan friendly act in recognition of tough economic times. This was accompanied by a healthy dose of derision toward the Yankees’ pricing policy. The comparison was intended to help to make the Red Sox’ look like the Sisters of Mercy compared to their rivals in Gotham City. The goal was for goodwill and continued sell-outs despite hard times while laying the groundwork for future price rises when the economy improves.
The Mets’ strategy was the most innovative. Arguably it had to be because the team lacked both consistent on the field performance and a level of fan support equal to that of the Red Sox or Yankees. Other facts and issues were also important:
• Citi Field was replacing Shea Stadium. It is a beautiful new state of the art ballpark with somewhat reduced seating capacity than Shea Stadium and an even more dramatic increase in amenities than at the new Yankee Stadium
• Because of their consistently weaker on field performance, the Mets corporate season ticket support is much less than that of the Yankees. Their season ticket holder base more closely resembles that of the Red Sox with a high level of individuals and small businesses
• In recent years the Mets rarely sold out games at Shea Stadium except for a few games with the Yankees, serious contenders or with teams with special appeal like the Dodgers for old Brooklynites.
• Scalper prices saw minimal price premiums to face value and limited demand for many games other than with top teams or in big game situations
Given these facts of life, the Mets chose a 2009 pricing strategy to achieve a balance of supply and demand on a game by game basis rather than on a seasonal basis. This meant higher prices for Yankee and Dodger games than for the Pirates or the Marlins. Premium seats, with far greater amenities, saw prices double from 2008 levels while non-premium seats experienced lesser increases in the 10-20% range (justified by reduced capacity, greater non-premium amenities and a unique new stadium). The net result is that premium Met seats behind home plate for Yankees games now range from $200-500 per ticket, while they are only $100-300 for the Marlins. Prices for similar seats at Fenway Park range from $85-500 for every game. At Yankee Stadium, they cost from $500-2,600 per ticket.
Which team had the best 2009 micro economic strategy? The answer is not easy. The Mets are filling their stadium for games against teams like the Marlins (it helps that the “fish” are playing well). The Red Sox continue to sell out regardless of the economy. What is easy to say is that the Yankees did not achieve optimal pricing. Empty premium seats abound. Scalper prices are below face value and the Yankees have just announced that premium season ticket holders will receive incremental free premium seats as a concession to over pricing.
Reasonable people are questioning whether the Yankees are compounding prior economic mistakes with these latest steps. Though the market has rejected their pricing strategy for premium seats, they are neither making refunds nor reducing the aggregate cash outlay for their customers. Rather they are just admitting that they have an excess inventory of premium tickets and giving away unsold high priced seats which they probably can’t sell. If the team’s on the field performance does not improve, it will be like a parent rewarding a child for eating much hated cauliflower by giving him more to eat!! This “great deal” is only being offered to premium season ticket holders who bought 82 game packages. It offers nothing to those who bought less than 82 game premium packages except to dilute the value of their tickets as full season premium ticket holders unload their newly received tickets at discounted prices. Perhaps worse, from a public relations perspective, it does nothing for loyal fans who downgraded their seating locations when the per ticket prices of their season tickets went from $10-12,000 to $40-80,000. While I am not a behavioral economist like my scholarly namesake at the University of Chicago, my guess is that the policy will be less than well received by the majority of Yankee Season ticket holders (see attached article from the New York Times).
Why were the Red Sox and the Mets approaches more successful than the Yankees? Were the Yankees blind to economic realities or just completely insensitive to their fan base? Arguably the same answer works for all of the questions. While it would be nice to say that the Red Sox and Mets were more sagacious than the Yankees because they are owned by self made entrepreneurs rather than 2nd and 3rd generation arrogant rich boys, that is probably only a secondary factor. The real answer is that the Yankees’ revenue base dwarfs that of the Red Sox and Mets. Unlike the Red Sox and Mets, they can afford to be wrong in their pricing strategy. For this reason, they were willing to take a pricing risk for even more revenue. The Yankees do have the potential to inflict long term damage to their brand but it probably won’t happen. As in the past, they will spend ungodly amounts of money to improve the team and, at some point, do a high profile “mea culpa” with free tickets to poor kids and a cut in ticket prices for all. Then, as the economy improves, the price increases will return to obscene levels. Red Sox and Mets fans could be upset if this happens. They should not be. Rather, they should view this as like hitting the daily double. The Steinbrenners will have to admit to an egregious mistake and Yankee fans will have to admit that they supported a team that tried to screw them!