Consumer Options: Theory and an Empirical Application to a Sports Market

Abstract

We introduce the concept of consumer options and empirically validate it in the context of event ticket pricing. We demonstrate that consumer options can protect consumers from the downside related to uncertain outcomes, and enhance seller profits by enabling superior market segmentation and increasing consumer willingness to pay. We examine ticket pricing in sports markets where there is uncertainty about the teams that will play in a final event (e.g., the NCAA Final Four basketball tournament). Fans who want to attend the game after knowing which teams will play are often disappointed because tickets typically sell out in advance. We propose that a fan can buy an option on a ticket before this uncertainty is resolved. Later she can decide about exercising the option. We present a simple analytical model of consumer options in this setting. We then empirically demonstrate that profits under options can exceed those from (a) advance selling, and (b) pricing after uncertainty is resolved. Our analysis and findings lay a foundation for future work on consumer options in marketing.

Keywords: option pricing, advance selling, pricing under uncertainty, event tickets, consumer options

JEL Classification: D11, M31