Pricing under uncertainty: Forward and Option Pricing in Sports Markets
Posted: 10 Feb 2023
Date Written: February 8, 2023
Sports organizations typically sell tickets for popular elimination style tournaments (e.g., NFL Super Bowl) well in advance of the final games. Fans hesitate to buy these tickets because they are unsure about whether their favorite team will play in those games. As the result the tickets are cornered by agents and scalpers and resold at exorbitant prices once the playing teams are clarified. This upsets fans and deprives teams and leagues of substantial revenues. To address these issues, we first introduce the concept of a consumer forward—here, a fan pays a reserve price to secure her team-specific forward ticket. If that team makes it to the final game, the fan must pay an exercise price to purchase the ticket. If the team does not make it, the forward expires. Interestingly, this allows the league to “oversell” a seat to one fan from every team on one side of the competitive bracket because only the fan of the team that makes it through will end up with a claim on the seat. Next, we compare how the forward performs compared to a consumer option. Unlike the forward, the consumer has the right but not the obligation to exercise the option. We also compare how these two mechanisms perform compared to the current practice of advance pricing. We undertake these comparisons both with and without capacity constraints and both analytically and empirically. We demonstrate how consumer forwards and options buffer consumers from uncertainty, enhance league and team profits, and help control scalping, We also discuss the potential for applying these mechanisms beyond sports markets.
Keywords: Forward Pricing, Option Pricing, Advance Pricing, Market Uncertainty, Consumer Heterogeneity, Capacity Constraints
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