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BACK TO BASICS: SUPPLY AND DEMAND


3/14/2012

Authored by Tim Baker and Steven Roth

As compelling as we find the study of behavioral economics, you just can't escape the logic of supply and demand that is the basis of classical economics

Ultimately, people do pay more for seats or events that are in high demand. Some arts marketers take advantage of this situation by tinkering with supply. They may hold some seats off sale in order to better manage demand; for example, holding the last week of a run off sale to fill seats in the earlier performances. 

This tactic can push demand into the earlier performances (which "perish" more quickly), build word of mouth, etc. Others may artificially make supply look scarce by keeping a lot of seats off sale and then releasing them at higher prices. This may be effective in raising revenue, but what's the impact on the customers who pay higher prices for worse seats? How does that affect your longer-term relationship with your customer?

And do we always want to follow the logic of supply and demand in the arts? Airplanes are as full as they have ever been, and airlines maintained price integrity to deliver continuing profits during a worldwide recession; largely by scheduling fewer flights. Do we really want our strategy to be about delivering less art?

Irrationality in Context

Robert Cialdini (Influence: the psychology of persuasion, 1984) gives a consumer psychology explanation for the way that perceived scarcity drives demand: our natural competitiveness leads us to believe that things that are difficult to possess are typically better than those that are easy to possess. We therefore use an item's availability to decide on its quality. 

More recently, Tim Harford (The Logic of Life, Abacus, 2008), puts this all in context, arguing that a lot of apparently strange behavior is actually quite rational, but that those rational choices are often more complex than we think. He points out that some of the effects we observe ARE irrational, but they do not influence everybody all the time, and especially not experienced people in realistic situations. "Sometimes we have to make important decisions when the situation is unfamiliar.... [but]... most people spend most of their time inside their comfort zone".

Throughout our research across the world we see this distinction played in the behavior of arts customers in relation to price. In frequent attenders, unfamiliar with an auditorium and lacking knowledge about a show seem to use price as a proxy for value and as such exhibit irrational behavior in relation to price  (we'll explore this in a later post, but price can be used by customers as a way to guarantee their experience).  Frequent attenders, on the other hand, have often been attending a venue for years – opera-goers sometimes know the repertoire and artists better than the management and classical music subscribers have an intimate knowledge of the auditorium that allows them to be extremely fussy about seat choice on the basis of acoustics. In these cases we get a much greater sense of informed customers making well-informed and rational choices.

Behavioral economics is about how irrationality alters the demand curve--not for all customers and not all of the time, but enough for you to want to think about how it applies.  So our pricing strategies need to adapt to that and identify which segments of the audiences are behaving more or less irrationally.



Image Credit: http://www.gocomics.com/nonsequitur/2011/04/04

This is the second in a series of posts to be published by Americans for the Arts. We will be sharing our reading and research on behavioral economics to bring the new perspectives and generate debate about pricing for arts and cultural experiences.

Note: Tim Harford is the Financial Times' 'Undercover Economist' and has a great website and blog.


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