What are the factors influencing NBA ticket pricing?

Issac Lee, Luke Yang, Mathis Zeissig

6^th Year

Table of Contents

Rationale 

Observable Phenomenon in Ticket Pricing

• Over the last few years we were able to examine that ticket prices in the National Basketball Association have risen consistently, especially over the covid affected years. 
• As Inflation struck due to the Russia-Ukranian war and the shortages it created heavily burdened consumers in which sport and entertainment pricing becomes crucial in the accessibility of these events.

Introduction

To achieve a balanced perspective on the issue, two NBA franchise is chosen for specific investigation.

It is identified that the New York Knicks have the highest average ticket price in the NBA consistently over the past few years while Charlotte Hornets possess the lowest average ticket price in the NBA in the past few years.

By focusing on these two franchises we are able to better distinguished the factors affecting the ticket pricing in the NBA with broad range of  comparison.

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Hypothesis

• We hypothesized the factors influencing the NBA tickets pricing for further investigations
• Average household income of the area 
• Popularity of the team
• Concession sales
• Elasticity of demand
• Interdependence
• Market share

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Sustainable Development goal 10 – Reduced Inequalities

• As prices increase the people that are able to afford tickets become less. This makes sports games, or in this case NBA games, a luxury good only affordable by wealthy people and closes the entertainment industry off for the average worker. 
• To achieve that the consumers well-being is often disregarded and not prioritized. This presents the problem that more inequalities are created between rich and poor people.  

Factors impacting Ticket Strategies

• Several economic factors, to different extents, influences decision-making in sport franchise in their ticket strategies. Slides below will provide evaluation in each of the economic factors

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Basic characteristics of Ticketing Industry

• Ticketing industry sells limited tickets with fixed capacity. Therefore, the supply or marginal cost curve remains vertical, as any additional cost such as human capital for additional output is negligible.
• The aim of this project is therefore to determine the factors affecting price set for NBA franchises, with specific focus on the Knicks and Hornets.

Basic Assumptions of Model

• Two basic assumptions exist in the model

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1. All NBA franchises, including the Knicks and Hornets, have the objective of profit maximization
2. All NBA franchises, including the Knicks and Hornets, are price-setters with capabilities to determine their own prices.

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These 2 assumptions will be proven and justified in the next section respectively

Assumption 1: Profit-maximization

Assumption 1: Profit-maximization

• For the purpose of this project, we hope to come to the assumption that NBA franchises are overall profit-maximizing firms
• Assuming NBA franchises attempt to achieve profit maximization, we instead focused on the compromised solution is an attempt to find proof of profit-earning tendencies of the Knicks and Hornets 

Statistics(Forbes Report)

Data analysis

• From the previous slide, it is apparent that both the New York Knicks and Charlotte Hornets gain overall profit. While the statistics of operating income accounts for aspects of income source unrelated to ticket sale, it still represents an important indication in the profit margins for revenue and cost in relation to ticketing sale.

Graph

• The graph indicates margin of average revenue and average cost during the profit maximization point where MB=MC

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• Supernormal profit therefore occurs when AR > AC.

Assumption 2: Price-setting capabilities

• Price-setting capability is a major assumption of NBA ticketing industry. If franchises do not possess abilities to determine and set their own prices, pricing strategies have no real value.

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• The next few slides provide justification or proof to this assumption.

Differences in Pricing 

• Team Marketing Report, provides weighted average price of non-premium seats among different NBA franchises for comparison purposes.

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• This source is likely to be credible and reliable as it is widely utilized for sport franchises to explore and investigate the optimal pricing strategy.

Bar Chart Analysis

Differences in Ticket Pricing

• From the bar chart, it can be observed that the Knicks and Hornets represent two extremes, where Knicks could most likely maximize their profits by charging the higher prices, Hornets generate their profits by charging the lowest price compared to other NBA franchises.

Factors Influencing Ticket Pricing

• There are reasons affecting ticket pricing strategies, in which the Hornets make the pricing decision to be the lowest among NBA franchises, while the Knicks went for the opposite approach to offer the highest price

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• In the following sections, we hope to explore the different factors influencing the different ticket pricing strategies

Factor 1: Market Share

• Market share is an important factor in determining the market power of firms. If a firm has larger market share, it can be presumed that they could have a larger influence towards market price.

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• Higher market price could also imply franchises could afford to charge higher price compared to competitors with less market share

Calculations of Unit Market Share

• Unit Market Share is the landmark indication of market share, where higher percentage of a single franchise would indicate a high dominance and influence towards the market

Revenue Market Share

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Revenue Market Share calculates total ticket revenue generated by an individual firm compared to the total ticket revenue generated through the whole industry, to determine the significance of an individual firm under this context

Market Share

Data Interpretation

• For unit market share, it is apparent that both Hornets and the Knicks do not own significant amount of market share, compared to the rest of the firms, indicating that they do not have noticeable competitive advantage as an influence to the overall market.

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• For revenue market share, Knicks hold considerably larger market share compared to the Hornets, but the differences in value is not significant enough for the Knicks to possess the power to influence ticket price

Evaluation

• Market Share, as a factor alone, seemingly fail to explain why the Knicks could adopt the pricing strategy of charging much higher price without fearing a massive loss of consumers.
• The advantage that Knicks hold over the majority of the NBA is negligible. And while there are considerable advantages in revenue market share over the majority of other franchises, the advantage and differences are mostly below 5% in revenue market, which is considered insignificant.

Evaluation

• It should therefore be suggested that market share is most likely identified as an unimportant feature influencing pricing strategies by NBA franchises.

Factor 2: Determinants of Demand

Differences in determinants of demand causes market mechanism to react, in which individual demand of a specific basketball franchise causes its price to be higher than average market price

Determinants of Demand

• As Individual Demand of the sporting tickets to the Knicks is higher than the overall market demand, market mechanism influences its price to be higher than average market price.

Determinants of Demand

• In the contrary, as Individual Demand of the sporting tickets to the Hornets is lower than the overall market demand, market mechanism influences its price to be higher than average market price.

Determinants of Demand

• Differences in Demand between individual franchise in the NBA ticketing market could be divided into two types
• Natural Determinants 
• Determinants achieved by product differentiation or non-price competition

Factor 2.1�Natural Determinants (Population Size)

• Data obtained by World Population Review looks at the US cities with the most population, with New York City being at top, while Charlotte ranked at 15.

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Population Size as a Demand Determinant

It is reasonable to suggest that domestic potential customers increases if population is higher than average, leading to a larger individual demand than overall average demand

Population Size as a Factor

Population size is an important indication of number of potential domestic consumers.

If approximately 20% of all American individual would be willing and able to attend a sport game. New York City would have a potential of 1798,581 domestic consumers demanding tickets. In contrast, Charlotte only has a population size of 183,505, leading to lower overall demand, thus the franchise could only charge a lower price in accordance to demand mechanism

Factor 2.2 Natural Determinants (Amount of Income)

• Data obtained by each state government shows that median household income of New York is slightly higher than average US income, while Charlotte is slightly lower than average US income
• Reference with comparison to other American city in median income is also included

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Income as a Natural Determinant/Factor

• Income is worthy of detailed research, not only because of its importance on pricing strategy, but its significance and implication in the sustainable development goals.
• If income is indeed a huge factor affecting ticket pricing such that pricing increases when income increases, a huge problem is portrayed due to the fact that when median income increases, the income of the poorest group of people usually remain consistently low.
• In such case, sport is essentially a rich man's activity, where access to live viewing is limited. This happens when the price to income proportions consistently increases, while income stagnantes.

Income as a Demand Determinant

It is reasonable to suggest that higher income would lead to increased demand for goods and services consumed for the purpose of entertainment.

This influences prices to increase/decrease due to income.

Empirical Approach to Finding Impact of Income on Pricing

• We are interested in exploring the impact of income and price. Two methods are used
• One is the traditional calculations of YED, such that the impact of income towards quantity demanded would be known, where income causes changes to quantity demanded, where quantity demanded influence pricing strategies

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• Two is the direct comparison of price and income, where the responsiveness of price towards income changes is examined.

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Sources

• Main sources used in this calculations are 
• FRED Economic Data on Income Changes for Charlotte City and New York City

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2. Ticket Sale Statistics from ESPN

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• NY Post Article: NBA Teams Hike Ticket Prices as Attendance Drops

https://nypost.com/2022/05/10/nba-teams-hike-ticket-prices-as-attendance-drops-internal-docs/

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Source Evaluation

All sources are associated with well-known authors or systems of research. The limitation of these sources would be some inevitable inconsistencies in obtaining data of exact ticket sale statistics between NY Post and ESPN. 

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ESPN is preferred in this case because of its official report on primary ticket sale, while NY Post utilized paid attendance, where ESPN is more relevant in this research.

Inflation Adjustment

• First it should be known that price inflation needs to be taken account.

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• For Example, average ticket price of New York Knicks, in 2018, is set at 143.90, to ensure accuracy of data, this statistics is adjusted into 2021 numbers.

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• Average inflation per year, according to macrotrends, is set at 2-3% each year, between 2018-21, a total of 6% inflation would be used.

Formula for CPI

If Price value in 2018-19 of the Knicks is set at 143.90, ​

its corresponding value in 2021-22 would be $143.90 × 1.06 = $152.53

Investigating YED

Year-to-Year Comparison for YED

• Using data from FRED Economic Data, 
• To control price factors in calculations of YED, income/price factors are used instead of only income values.
• All data is adjusted for inflation, either by myself or system mechanism

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Table of Processed Statistics

Formula for YED

YED Example Calculations (Knicks)

YED Example Calculations (Knicks)

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YED Example Calculations and Interpretations

• As changes in quantity demanded is less than changes in its corresponding household income/price ratio, it is reasonable to suggest that income is a viable but insignificant factors influencing demand
• As income/price decreases, quantity demanded also has a decrease

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Income/Price Ratio

Processed YED Data

Evaluation

• Both the Knicks and Hornets have noticeable differences in income elasticity of demand compared to the average American Franchise. 

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• While the average franchise most likely has a unit elastic value, with quantity demanded adjusting during a change of income proportions, both New York and Charlotte did not experience a major change of quantity demanded in the same scenarios.

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• Therefore, initial conclusions should be drawn that while income is an important factor affecting demand and pricing strategies in at least some other NBA franchise, similar levels of effect is not observed in both the Knicks and Hornets 

Another Approach

• After the initial calculations of YED, where the indirect effect of demand will influence pricing strategy, we hope to look at the direct effect of price due to a change of income, with the equation

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Income/Price Changes

Income/Price Changes Interpretation

• For the New York Knicks, small changes of income seemingly correspond to a large change of price
• Whereas the Hornets experience the complete opposite and adverse effect, where increase of income correspond to a small change of price.

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• There are reasons to believe both the Hornets and the Knicks represent two outliers in this scenario, in which the change of price of average NBA franchise is a scale factor of about 2.5 of income changes.

Evaluation

• Application of economic theories into real-life NBA scenarios meet certain difficulties, where income changes do not necessarily imply price changes. Especially in the case of the Hornets, where a negative relationship between the two is observed. Such that the effect of income towards price changes are unclear.

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• Still, there are comparatively clearer indication that other NBA franchise behave with certain pattern, with a change of price in response to a change of income.

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Impact on SDG

• With income increases, higher amount of income is possessed by less percentage of people. The poorest become poor under inflation, the richest become richer.

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• The consistent increase in ticket price further capitalized the issue, allowing only wealthy individuals to attend games.

Factor 3:PED

• PED, defined as the responsiveness of quantity demanded against price changes, is an important factor determining ticket pricing strategy.

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• Two scenarios of PED would be discussed below:
• one is the overall shape and elasticity of sport tickets,
• Secondly is the PED in different points around different ranges along a demand curve

Calculations of PED

• Equation of PED is illustrated below:

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Table of Processed Statistics

PED 

Evaluation

• Through evaluation, it could be known that the Knicks have the most inelastic demand, with its PED firmly below 1, meaning that even when price changes, the response of quantity demanded would not be violent.

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• This could explain why the decision-makers of the Knicks are more willing and able to charge higher prices than its rival franchises without fearing a massive loss of consumers.

• In the diagram, the elasticity of the demand curve is demonstrated by a steep demand curve, such that in the event when price increases, quantity demanded decreases to a lesser extent, where gain in revenue is seen.

Graph

Graph

• In contrast, it should be viewed that the Hornets would suffer a loss in revenue if they charge higher price, with an elastic and more horizontally-built demand curve

Evaluation

• Application of PED in real-life scenario matches with economic theories, when the decision-makers of the Knicks noticeably charges higher price than the Hornets.

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• For decision-makers for the Hornets, responsive changes in quantity demanded is usually higher than changes in price, so that decrease of price would lead to proportionally higher quantity demanded. 
• The opposite situation applies to the Knicks, where they logically should charge higher price because changes in price would always be larger than quantity demanded.

Limitation of PED

• It is difficult to separate price as the only variable affecting ticket pricing strategy.

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• Other demand determinants such as income, population and other factors mentioned or discussed also affect ticket pricing strategy to different extent, leading to uncertainty in effectiveness in research.

Factor 4: Consideration of Concession Sale

• Sport economists investigating sport tickets usually emphasized the fact that tickets are only the initial source of revenue, where consumers could spend additional wealth on other concessionary products such as food and beverage.

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Literature Review

• Two research articles specifically highlighted ticket pricing strategies

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1. Dennis Coates: Ticket Prices, Concessions and Attendance at Professional Sporting Events

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• DR Marburger: Optimal Ticket Pricing in Performance Goods

Both articles agreed that sporting franchise would purposefully charge lower price such that not only the revenue generated from tickets, but also concession sales could be maximized.

Literature Review

• Other than that, both research papers agree that sport franchises typically set price in slightly inelastic points on the demand curve, instead of the typical unit elastic point to maximize profits

Inelastic Portion of Demand Curve

• Setting prices at the inelastic portion of the demand curve means that attendance to sport events would be higher.

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• Economists emphasize the logic that, with higher percentage of attendance, potential further spending inside the stadium also becomes larger.

Setting price at the Inelastic Demand Portion

Larger Attendance to Sport Games

Higher Total Spending

Fan Cost Index

• To maximize revenue, firms need to consider a revenue-maximizing ticket price, but also the price of other concessionary items, such that the total revenue, generated not only from tickets, but also concessionary items available inside the stadium, could be maximized.

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• Fan Cost Index, created by Team Marketing Report, takes into account concession sale and parking fees to calculate the total real cost of attending an NBA game.

Fan Cost Index

• Economists argue that decision-makers from NBA sport franchise not only considers ticket pricing, but also considers conditions of the overall fan cost index, to determine the profit-maximizing price charged. 

Figure Explanation

• The figure shows the motivation behind lower ticket prices set at inelastic portions of the demand curve such that revenue could be maximized, where the Knicks, through setting lower prices, could manipulate consumer to increase spendings on concession products during the viewing of an NBA game.
• Therefore, although revenue derived from ticket sale would be maximized at TR, the Knicks is predicted to operate at TR1, so that overall revenue could be maximized. The indication of a pricing strategy strengthens the argument that the Knicks have an exceptionally strong price-setting ability. 

Evaluation

• Further than just increasing potential customers for spending, this pricing strategy has the effect of manipulation of consumption behaviors. Influencing the desire of consumers to purchase additional concessionary goods, by lowering prices, allow the Knicks to generate the most possible revenue. Through the thoughtfully constructed pricing strategy, the benefits of price-setting abilities of the Knicks could be maximized to generate profits. 

Factor 5: Interdependence

Interdependence(Larger Market Teams) 

• (Using ticket price derived

from New York Post)

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There is at least some indication that ticket price is independent, such that when other franchise increases their prices, the Knicks would consider this change, simultaneously adjusting their ticket price to match price change from rivals.

Interdependence

• Using Team Marketing Report with weighted ticket price under non-premium seats, it is derived that 18 sport franchises have offered the same non-premium nominal ticket pricing(in the AT$).

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Other Factors: Popularity

• Ticket sell and brand loyalty is correlated strongly with team success. 
• The Phoenix Suns in 2019 – 2020 season has seen a dramatic improvement in team success adding 13 wins, which led to 151% ticket price growth.
• Players become one of the most important conjectural variable in the NBA

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Evaluation

While there are indications of trends of interdependence, there is no conclusive mathematical or empirical evidence that interdependence and conjectural variation is a significant factor affect pricing strategy.

�Still, decision-makers from franchises are likely to at least take into account of pricing of rival firms, before determining their own price.

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Conclusion

• 5 main Factors influencing ticket pricing strategy of franchises are identified below, each factors likely affecting decision-making of sport franchises.

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• Through evaluation of each factors, a basic ranking could be created of the extent of importance of different factors affecting ticket sale.

Conclusion

• The factor having the least influence towards ticket pricing strategy is market share factors. As market share remains largely balanced between NBA firms, no competitive advantage or dominance could be seen in any NBA franchise in ticket sale.

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• This finding implies that market share is most likely a minor or unimportant factor for decision-makers to determine ticket pricing.

Conclusion

• The factor that has a slightly larger influence is interdependence.

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• With the analysis of statistics, there is valid indication that decision-makers from NBA franchises would at least consider the different ticket pricing from rival firms.

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• But the limitation behind this factor is the absence of an empirical method in the context of this research to determine the human behaviour of interdependence.

Conclusion

• Population factors as a demand determinant most likely has an impact towards ticket pricing strategy. 
• In cities with higher population, larger potential customers would increase demand, which then resulted in the market mechanism of higher price and quantity demanded.

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Conclusion

• Another factor that has a considerable impact towards ticket pricing is income. 
• Income could directly or indirectly influence ticket pricing, with average NBA franchise having a 2.46 Price/Income responsiveness under a direct relationship.
• Indirect relationship could be seen when value of income affects demand, which affects With YED remaining mostly at 1, with the Hornets and the Knicks both being outliers. Therefore, income, being a demand determinant, also affects pricing strategy.

Conclusion

• PED could be seen as a significant determinant for pricing strategy,
• The PED of Knicks being inelastic while PED of the Hornets is elastic, meaning the Knicks could earn more revenue through charging higher price while the Hornets would most likely achieve profit maximization through charging lower price to earn a more extensive quantity demanded.

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• The economic theory therefore explains the phenomenon in which the Knicks charge higher price than Hornets.

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Conclusion

• Lastly, the consideration of concession sale, as researched plenty by previous economists, look at additional spendings of consumers during their attendance to a sporting event.

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• While not empirically proven in this project, it is likely that franchises tend to sell tickets in lower prices within the inelastic portion of the demand curve to increase potential spending on concession sale, and increase the overall revenue.

Bibliography

New York Post Article, NBA Teams Hike Ticket Prices as Attendance Drops

https://nypost.com/2022/05/10/nba-teams-hike-ticket-prices-as-attendance-drops-internal-docs/

ESPN Attendance Statistics

• https://www.espn.com/nba/attendance/_/year/

Team Marketing Report Fan Cost Index

• https://teammarketing.com/fancostindex/

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Bibliography

• The Conversation, The Economics behind Inelastic Ticket Pricing

https://theconversation.com/the-economics-behind-inelastic-ticket-pricing-video-7987

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