One of my favourite VC blogs is Laserlike by Mike Speiser, the original concept of which was to provide free ideas to entrepreneurs. One of Mike’s early ideas on auctioning off movie tickets caught my attention, enough that I decided to research the idea further.

Firstly I think it’s hard to apply this idea to movie tickets, since doing so would conflict with the common pricing policy of selling tickets at cost and profiting from advertising and candy bar sales. However, it seemed like a great idea for tickets to one-off sporting and entertainment events.

In theory, auctioning-off such tickets would be optimal - by charging all customers the price that they’re willing to pay (or more precisely the price that the next highest bidder is willing to pay) you would maximise revenue, achieving something approaching perfect price discrimination. The two major conditions for price discrimination are poetically met:

1. Since you would be the sole vendor of tickets for unique events, you would have a clear monopoly, with the only seepage occuring through scalpers; and,
2. Since your consumers are actually fans (of varying degrees of rabidness) there is a significant difference in price elasticity between customers - quite simply, some fans are willing to pay much more than others are, for the same thing.

So why then did I decide it wouldn’t work? Because of the public backlash in Melbourne when Ticketmaster Australia decided to auction off just a small fraction of tickets to a concert by The Police. The tactic created enmity towards both Ticketmaster and the band, only partially mitigated by a policy of donating some of the proceeds to charity. As far as I can tell, Ticketmaster no longer conducts ticket auctions in Australia, and auctions only a small number of tickets for charity purposes in the US.

So here is the fatal flaw: The fans that are willing to pay the most for your tickets (i.e. those with a price elasticity approaching zero) are also going to feel the most betrayed. They’re also the most likely to vocalise their outrage. So by alienating your best customers, you’d in effect be cashing in some of your goodwill, ultimately diminishing the value and longevity of your product.

While price discrimination might work if you’re selling grande coffees or “deluxe edition” cars, there needs to be a significant paradigm shift before it can be applied to selling identical tickets. Otherwise, the very customers who drive your sales will be the first to foresake you.