Multiproduct Pricing in Major League Baseball: A Principal Components Analysis

By Depken, Craig A., II; Grant, Darren | Economic Inquiry, April 2011 | Go to article overview

Multiproduct Pricing in Major League Baseball: A Principal Components Analysis


Depken, Craig A., II, Grant, Darren, Economic Inquiry


I. INTRODUCTION

How do firms set their prices? The question is easily answered if the firm sells a single good at a single price: There should be an inverse relationship between the percentage markup and the elasticity of product demand q, as prescribed in the famous Lerner Index relation (P - MC)/P = 1/[eta].

One could easily overlook the dual nature of this relation--it is both structural and heuristic. It is structural because it is formally derived from fundamentals; it is heuristic because it can be articulated in simple, intuitive terms. Thus this one equation gives, in fact, two overlapping descriptions of how firms set their prices. Both have value: textbooks in economics and marketing focus on heuristics, whereas structural models are preferred for policy analysis.

Of course most firms do not sell one good, but many related goods, at nonuniform prices. Then the concordance between structural models and heuristics cannot be sustained. Structural models of nonlinear multiproduct pricing, elaborate equations derived from first principles, are precise but difficult to simplify, interpret, or apply. In comparison, heuristics such as tying, bundling, or two-part pricing are crude but intuitive and easy to use. There are still two overlapping descriptions of how firms set their prices, but they are no longer conjoined.

This divergence is recognized in theory, but not in application. Empirical studies of multiproduct pricing have uniformly adopted a structural approach, despite many obstacles to its use: a large number of relevant variables, both dependent and independent; scant data on some of these variables; and estimation difficulties. These formidable obstacles have sharply limited the number of empirical analyses of multiproduct pricing and have compromised the ease and rigor with which they are conducted. As a result, despite the ubiquity of this problem in practical business decisions, the literature does not contain a set of stylized facts that tell us how multiproduct firms set their prices.

Our solution--inductive, not deductive; practical, not perfect; heuristic, not structural--relies upon a factor-analytic technique, principal components analysis. This reveals, rather than imposes, structure in the data, breaking down price co-movements into a few independent patterns that can be easily described, naturally interpreted, and rigorously tested. In this paper we explicate this method and apply it to pricing in Major League Baseball (MLB), a topic of long-standing interest in sports economics and the quintessential multiproduct pricing problem.

Pricing in MLB occurs in geographically isolated markets in which most teams are local monopolists; all sell multiple products including tickets, parking, and concessions, at prices that vary substantially and nonuniformly across teams and across time. Several factors emphasized in the general theory of multiproduct pricing are potentially relevant: The general demand for any team's "product bundle" fluctuates substantially over time, whereas the products sold by the team are related in demand and potentially subject to nonlinear pricing, such as second-degree price discrimination, in order to maximize the capture of consumer surplus.

Yet a structural analysis of multiproduct pricing in MLB is impractical for all the reasons listed above. The required concession quantity or revenue data are simply not available; nor are good instruments for prices. And the formal theory of multiproduct pricing is not well developed for this straightforward yet nontrivial case, which combines an obligatory entry fee (the ticket price) with complementary, discretionary, multiple-purchase concessions. Acquiring a basic understanding of pricing in this market requires a methodology that needs little a priori theoretical structure while accommodating many prices but limited data on quantities, costs, and demand--precisely the province of principal components.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Multiproduct Pricing in Major League Baseball: A Principal Components Analysis
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.