The economics of pricing AFL Finals tickets

In my ECONS101 class, we have a topic that is devoted to understanding pricing and business strategies that deviate from the ideal 'marginal revenue equal to marginal cost' approach to pricing for firms with market power. In particular, I focus part of the topic on firms that price below the short-run profit-maximising price for strategic reasons.

One example is the NFL, which prices tickets for the Super Bowl too low. This is a surprising example to students, because the face value for the cheapest ticket for Super Bowl LX this year was $950. However, we know that this price is too low because the cheapest tickets on the secondary market were selling for around $6,400. That suggests that the NFL is leaving money on the table - they could earn much more if they set the ticket prices higher. Why would the NFL set the price lower than the short-run profit-maximising price for the Super Bowl? One reason may be that they want to maintain a long-term relationship with NFL fans. They want going to the Super Bowl to be an achievable aspiration for fans. Most fans won't be able to pay US$4,000 (plus the travel and accommodation costs) to attend every year, but at that price it is reasonable for fans to believe that they can attend once during their lifetime. If Super Bowl tickets cost over US$10,000, then that aspiration becomes much less achievable. This long-term strategy is also visible through the allocation of Super Bowl tickets. Each team gets an allocation of tickets, 35% of which must go to fans, and that allotment is typically given to the team's season ticket holders (see here).

The Super Bowl is recognisable to my students. However, thanks to this article in The Conversation by Paul Crosby (Macquarie University), I now have another example that is somewhat closer to home (albeit not necessarily more recognisable than the Super Bowl):

It’s AFL finals time – and in a season on track for record attendance, the league’s decision to freeze the price of entry-level finals tickets for an 11th straight year is smart economics...

So why are entry-level footy tickets staying cheap? It’s all about investing in the future – especially when there’s a lifetime of spending at stake...

Finals matches routinely sell out, so standard economics would suggest raising prices.

Instead, entry-level tickets for the AFL’s qualifying, elimination and semi finals, as well as this weekend’s wildcard round, have been frozen at A$35. Entry-level preliminary finals tickets will be $65, unchanged since 2016.

Crosby explains this pricing strategy as arising from fairness and goodwill towards fans, then notes that:

Cheap tickets can be an investment. A full stadium creates value beyond ticket revenue. Crowds generate the atmosphere that makes live sport attractive to television audiences and, in turn, valuable to broadcasters and sponsors.

An AFL supporter will often remain attached to the same club for decades, buying memberships and merchandise, watching broadcasts and eventually bringing their children along. A fan won over by a $35 ticket is worth far more than the profit on that ticket.

Keeping tickets affordable, and occasionally letting kids in free, helps recruit that next generation.

By keeping the price of finals tickets low, the AFL is foregoing short-run profit maximisation in favour of a long-term strategy that keeps fans engaged, keeps them attending games, and may lead to greater revenue and profits overall in the long run.

Crosby compares the AFL's pricing strategy with the approach adopted by music acts, who are increasingly using 'dynamic pricing' to maximise short-run profits from every concert. However, the situations are different in a meaningful way. The AFL can afford to have a long-term focus because it has a revolving cast of star players, while the teams endure. AFL fans typically follow a team, rather than particular players. In contrast, not every musical act is going to be The Rolling Stones, still touring after 60-plus years. For the most part, a musical act is not a revolving cast of musicians (especially for solo acts). A musical act's window for profiting from their talent is much shorter than the AFL, so we might expect to see short-run profit-maximising behaviour from musical acts than for the AFL. It is all about maximising profits over the appropriate time horizon. For the AFL or the NFL, a price that looks too low for today's ALF finals game or Super Bowl may be exactly the right price for maximising profits over the lifetime of a fan.

Book review: Economics for Dummies

Since I recently read Econometrics for Dummies (which I reviewed here), it seemed fitting that I follow up with Economics for Dummies, by Sean Flynn. I read the second edition (published in 2011), but I see that there is a third edition now (published in 2019). While my impression was that the econometrics book would be a good companion to a 'traditional' textbook on econometrics, Economics for Dummies is very much a textbook treatment of microeconomics and macroeconomics, which would not be out of place as the required textbook for an undergraduate course in the principles of economics. While Flynn does a good job of keeping things light, as you might expect from a book in Wiley's 'Dummies' series, this is not really a 'pop economics' book.

That disappointed me a little, because I wasn't expecting to read a textbook. Having said that, Flynn does take a refreshing approach to some parts. I really liked the way that he builds up the demand curve from a starting point of marginal utility. I hadn't seen it done that way before. And there were several parts of the macroeconomics section, including a more complete circular flow of income that we often see in textbooks, and a surprisingly thorough discussion of Keynesian economics, that I appreciated. If I was teaching the macroeconomics section of my ECONS101 class, I would certainly be drawing on this book to assist with those aspects.

The book does have several surprising blind spots though. It covers asymmetric information and adverse selection, but never discusses the roles of signalling or screening as solutions to adverse selection problems. It also contains a few errors, including explaining that supply curves slope upwards because of increasing costs (it should be increasing marginal costs), and referring the government spending as part of monetary policy (it is part of fiscal policy). Possibly those bits got fixed up in the more recent edition. I sure hope so.

Overall, I wouldn't strongly recommend this book, but only because there are a generous number of economics principles textbooks around. This book, unfortunately, doesn't really stand out from the crowd. If you had to read it as a textbook, it would be fine, but I wouldn't prefer it over any of the other mainstream options.

This week in research #140

Here's what caught my eye in research over the past week (another quiet week, it seems):

• Higney et al. (open access) estimate the marginal value of bird song, using a choice experiment with a 'simulated soundscape'

Also new from the Waikato working papers series:

• Gibson, Boe-Gibson, and Scrimgeour use night-time lights to measure the urban expansion and contraction of urban areas in New Zealand, finding that rapid expansion is concentrated in commuter towns surrounding major cities and amenity-oriented settlements, while some smaller towns experience contraction associated with economic restructuring and changing locational advantages

John List on critical thinking and teaching economics

When it comes to buzzwords in education, critical thinking probably ranks at or near the very top. The problem is that not everyone agrees what critical thinking is, how students can be taught to think critically, or even whether critical thinking is something that can be explicitly taught at all (as opposed to being tacit knowledge). So, it can be instructive to see how other people, particularly top thinkers in your own discipline, conceptualise critical thinking, and how they propose training students to think critically.

So, I was glad I finally round time this week to read this 2022 article by John List (University of Chicago), published in the Journal of Economic Education (ungated earlier version here). He develops a 'Critical Thinking Hierarchy', and then describes how this can be applied to student learning.

List defines critical thinking as "individual skills that facilitate logical and informed decisions", and notes that:

In my own experiences, these skills can naturally be divided into two complementary pillars:

• Connecting the dots with empiricism: developing and assimilating empirical evidence and updating of one’s beliefs

• Connecting the dots with abstract thought: putting the puzzle together with conceptual reasoning; thought experiments

The hierarchy that List develops is then described in Figure 1 from the paper:

The hierarachy starts with modal thinking, characterised by various biases, preconceptions, and prejudices. It then moves to neophyte thinking, where the importance of thinking and empiricism begin to be recognised, but the execution isn't yet there. Adept thinking progresses to critical questioning, recognising blind spots, and understanding causation. Finally, great thinkers understand and correct for their own biases, and constantly re-examine their assumptions. An obvious question, though, is how a teacher moves their students up through the hierarchy. List advocates that teachers should encourage their students to 'slow think' (drawing inspiration from Daniel Kahneman's research, as outlined in his book Thinking, Fast and Slow). Specifically, List recommends that we teach students to apply six basic tenets:

1. state, explain, and clarify the question(s)

2. think through the question(s) from multiple points of view, expressing their own priors using logical thinking

3. gather, organize, assimilate information and data

4. identify assumptions, shortcomings, and implications of the data generation process

5. update priors, both their own priors and consider how other’s views might change

6. explain and apply what they learn, connecting what they just learned to other economic concepts, learnings from another course, and/or their everyday life

He then offers a set of necessary conditions through which those six basic tenets can be embedded to develop critical thinking (CT):

A. Early discussion of simple empirical tools; distinction between correlation and causation; and, provide examples throughout the course that distinguish causation and correlation

B. Theory of mind should be reinforced (I cannot think of a better place than game theory); briefly introduce psychological biases that prevent the student from becoming Adept

C. Because CT development is a social activity, both lab and field experiments should be used as pedagogical devices to promote CT...

D. Connect theory to empiricism and highlight potential shortcomings of both without undoing the major insights

Finally, the punchline is that this approach is part of the textbook that List co-authored with Daron Acemoglu and David Laibson. So, was the whole article an elaborate advertisement for the textbook? Perhaps, but I think there is a greater value in what List has shared. Right now, my colleagues and I are re-designing the economics curriculum at the University of Waikato from the ground up. We haven't explicitly embedded critical thinking in that design and yet, when I look at the four necessary conditions that List has proposed, and the two critical thinking skills that the article starts with, I can definitely see those in what we are developing. In particular, linking economic theory to empirical research and insights is already a particular strength of economics at Waikato.

List wrote his article in 2021, and it was published in 2022, before the release of ChatGPT and the widespread adoption of large language models. It would be reasonable to ask whether generative AI would make a difference to what List proposes. I don't believe that it change the core of List's framework. In fact, it makes the framework more important and changes how we should implement it, because the thoughtful integration of generative AI into higher education may lead to greater opportunities for students to engage in intentional development of the critical thinking skills that List proposes. Think about the application of simple empirical skills. These are skills that students can learn to use alongside generative AI, if their interactions are intentionally designed to promote engagement and learning, rather than cognitive offloading. For example, students might use generative AI to collate data and test an empirical relationship, while thinking about how they might distinguish causation from correlation. A custom GPT would allow for limitation in the range of techniques that could be employed so that novice students don't get overwhelmed. Lab and field experiments can be integrated into classroom learning, and I know that both Steve Tucker and I do that in our classes already. Experiments can be incredibly powerful tools for promoting student learning.

Critical thinking may be an education buzzword, but that doesn't mean that it isn't important. I like List's metaphor of 'connecting the dots'. As generative AI continues to develop and becomes a more useful tool across a wider range of analytical and other activities, connecting the dots alone will not be enough.  Students will need to know which dots matter, whether they genuinely connect, and what conclusions the connected dots allow them to draw.