Real Options Applied to Consumer Goods: Maximizing Profits and Fan Welfare

Abstract

This paper demonstrates that both consumer utility and event organizer profits increase when tournaments played at neutral sites sell tickets via options, which are exercisable only if the desired team reaches a given round of the tournament, and advanced selling; rather than just utilizing an advance selling strategy. This approach yields a separating equilibrium pricing strategy. Through this ticket pricing strategy, the organizer can realize a significant increase in profits as a result of a separating equilibrium. Simultaneously consumer welfare increases as fans know, with certainty, they have tickets to the game if their team makes it. If these options were offered by participants instead of organizer it allows them to smooth their revenues over time.

Keywords: Real Options, Sports, Ticket Pricing

JEL Classification: G1, L83