Artists Should Charge Fans More – So Everyone Benefits

That’s the argument behind another interesting article from Adam Davidson, who created NPR’s Planet Money.

Why? Because

(a) “Value” and “Price” are two very, very different things that are easily confused by most people and

(b) A lot of artists don’t want to appear too greedy by setting ticket Prices close to what fans Value them. 

But this just results in scalping, he writes:

… by leaving money on the table, Springsteen and his ilk might be doing their fans an inadvertent disservice. Jared Smith, the president of Ticketmaster North America, told me that the artists who charge the least tend to see the most scalping. Springsteen and others have angrily denounced scalping at their shows, but their prices are guaranteeing the very existence of that secondary market, which has become ever more sophisticated over the years. Many scalpers now use computer programs to monopolize ticket buying when seats go on sale, which forces many fans to buy from resellers. One of the surest ways to eliminate scalping, Smith told me, is to charge a more accurate price in the first place.

And what happens when artists charge more?

Generally speaking, Smith says, artists who charged a lot more for the best 1,000 or so seats would reduce the incentive for scalpers to buy these tickets; it would also allow artists to charge even less for the rest of the seats in the house. Kid Rock told me that on his forthcoming tour, he is planning on charging a lot more than usual for “platinum seating” so that all other seats — including those in the first two rows — can be around $20. “It’s a smart thing for me to do,” he said. “We’re going to make money; I’m going to make money. I want to prove there is a better way to do this.”

Smith, meanwhile, spends much of his time these days trying to persuade artists that increasing the price of their top tickets to near the point where supply meets demand is not greedy but equitable for their fans. “Every time I convince an act, we get three more artists to sign up,” he says. “There’s more and more acceptance.”

The impact is already being felt on the street. Outside the Petty show, one scalper told me that, back in the ’80s and ’90s, he made more than $70,000 a year reselling tickets. But now he is lucky to clear $30,000. “A $300 night is a home run now,” he said. His business has suffered tremendously since 2007, when New York State legalized ticket reselling and helped supply meet demand. “StubHub is killing us,” he said.


Incentives, Israeli Day Care Centers And Human Behavior

As you might reasonably expect, money and other forms of incentives make us behave in very interesting and unexpected ways (consumer behavior, an obsession for this blog, being a specialized case). 

Here’s something else I ran into the other day on Quartz, in this area, that I offer up as food for thought:

Something similar occurred in an Israeli day care center that was faced with the problem that more and more parents were coming late—after closing—to pick up their kids. Since the day care center couldn’t very well lock up and leave toddlers sitting alone on the steps awaiting their errant parents, they were stuck. Exhortation to come on time did not have the desired effect, so the day care center resorted to a fine for lateness. Now, parents would have two reasons to come on time. It was their obligation, and they would pay a fine for failing to meet that obligation.

But the day care center was in for a surprise. When they imposed a fine for lateness, lateness increased. Prior to the imposition of a fine, about 25% of parents came late. When the fine was introduced, the percentage of latecomers rose, to about 33%. As the fines continued, the percentage of latecomers continued to go up, reaching about 40% by the 16th week.

Why did the fines have this paradoxical effect? To many of the parents, it seemed that a fine was just a price. We know that a fine is not a price. A price is what you pay for a service or a good. It’s an exchange between willing participants. A fine, in contrast, is punishment for a transgression. A $25 parking ticket is not the price for parking; it’s the penalty for parking where parking is not permitted. But there is nothing to stop people from interpreting a fine as a price. If it costs you $30 to park in a downtown garage, you might well calculate that it’s cheaper to park illegally on the street. Any notion of moral sanction is lost. You’re not doing the “wrong” thing; you’re doing the economical thing. And to get you to stop, we’ll have to make the fine (price) for parking illegally higher than the price for parking in a garage.

(emphasis above, mine)

The original article, written by Kenneth Sharpe, a Professor of Political Science at Swarthmore College, appeared on LinkedIn. 

Sunk Costs – A Useful Fallacy?

As anyone with a passing interest in economics (which, by the way, I think every literate human being on the planet should study or make more than a passing attempt to understand) knows, the “Sunk Cost Fallacy” is a big deal.

It is also something that prevents us from making rational choices in many cases, even in our daily lives. But does it serve a useful purpose? 

Yes, it does, argue two economists:

That is the counterintuitive theory that Sandeep Baliga of the Kellogg Graduate School of Management and Jeffrey Ely of Northwestern University’s Department of Economics advance in their paper “Mnemonomics: The Sunk Cost Fallacy as Memory Kludge.” The authors argue that human beings—even rational ones—have a limited capacity to remember the original reasoning behind their decisions. If that capacity is exceeded, the information could be lost—so we need a mental placeholder that can remind us of why we decided something, just as tying a string around your finger reminds you that you need to pick up milk on the way home from work. This kind of ad hoc “memory device” is called a mnemonic. Mnemonic devices often encode some aspect of the relevant information as well, just as the letters in the mnemonic name “Roy G. Biv” stand for the first letters of the colors in the rainbow.

You can read the rest of the article (remember to also read the comments!) here


Demolishing The “Rational Consumer” Myth

As consumers, we like to think that we are rational beings that carefully, and instantly, perform cost-benefit analyses in our heads every time we have  serious decisions to make. 

So we have consumers who, when they need to buy, say, a new digital camera for $200,  spend three hours reading 10-15 reviews on Amazon and CNET, asking their Facebook and Twitter friends for their recommendations and possibly soliciting advice from colleagues at the water cooler. 

If you momentarily overlook the opportunity cost of those three hours, all of that seems like perfectly rational behavior.

Even if they are not particularly price sensitive, those consumers expect to get a certain amount of utility from that purchase and consequently want to make sure that they can do everything they can pre-purchase, to minimize remorse and maximize satisfaction. 

But say it’s Friday evening and the same group of consumers is thinking about a night on the town. 

There’s this hot new club that is very difficult to get into. Celebrities are known to stop by every weekend. Many that they know have stood outside for hours, but couldn’t get in. The good news though is that a friend of a friend has an acquaintance that can get them into the club. The catch? They are still on the hook for the cover charge ($100) and their 4-person group must get table service for $1200. Before the evening is over, each of them is going to be poorer by at least $400, maybe $600.

So how long do they spend on deciding whether they are “in or out”, in this case? Remember that it’s a situation that involves a decidedly one-time experience which will likely be “washed over” by similar expensive experiences in the future (unlike the digital camera that is going to look them in the face day after day).

The problem with classic economics is that it assumes that consumers always behave like those in the first example above, whereas, in reality, they are often like the ones in the second one. 

The Economist makes the point much more eloquently of course, as it always does: 

“SOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness.” This was Daniel McFadden’s memorable summation, in 2006, of the idea of Everyman held by economists. That this description is unlike any real person was Mr McFadden’s point.

The Nobel prizewinning economist at the University of California, Berkeley, wryly termed homo economicus “a rare species”. In his latest paper* he outlines a “new science of pleasure”, in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of behaviour that do not fit the standard models. Rather, what economists consider anomalous is the norm. Homo economicus, not his fallible counterpart, is the oddity.

While the full article I excerpted from, above, focuses on the theory of consumer choice specifically, the sample human biases discussed in there strike some powerful blows at our purported rationality.  

Students of marketing (and human psychology…for, what is marketing but applied psychology?) will find it worthy of their time. 

PS: For another fascinating example of human psychology affecting consumer behavior, read this HBR blog post

[* “The New Science of Pleasure”, NBER Working Paper No. 18687, February 2013]


Consumers, “Defaults” And Happy NYC Cabbies

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Some restaurants quite helpfully print a range of suggested tip percentages on customer checks (15%, 20% and 25% are not uncommon). 

One way to look at it is that it’s a public service. Since many patrons might be in a rush or intoxicated, or perhaps both, these helpful numbers make it easy for them to quickly add whatever they deem best to the check and go about their day. 

But an interesting article on Bloomberg by Harvard Law School Professor Cass R Sunstein suggests that they may be trying to leverage the power of “defaults” (an economics term).

He cites research that shows how the three most common “defaults” (20%, 25% and 30%…but 30%??!! Ha!) displayed on passenger-facing credit card payment displays have managed to increase NYC cabbie income by 10%. 

But why?

(more…)

More On T-Mobile – “Gangbusters” and Confused Consumers

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I recently said that while T-Mobile’s revolutionary plan to change the US cell phone market’s pricing model is great for US consumers in theory, in practice, much depends on its marketing and messaging. 

That’s because consumers are not sophisticated and I thought (and continue to think) that unless T-Mobile does a great job explaining the new non-subsidized phone purchase plan and its simplified monthly plans, it may have trouble attracting customers. Especially those from #1 Verizon, #2 AT&T and #3 Sprint – who might be more inclined to spend more over the lifetime of their relationship with T-Mobile, as opposed to “value” customers.

And today, there are two things to report.

The first thing is that the introduction of this new pricing model coincided with T-Mobile’s ability to sell the (still coveted) iPhone for the very first time.

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And public reaction, at least on Day 1, seems to be very good:

(more…)

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