As the football season comes to an end with the Super Bowl, many sports fans look forward with eager anticipation to spring training and the start of the baseball season.  A perpetual optimism reigns for most fans, even though for some this hope will be replaced by doubt in a few short weeks. In recent years, many teams have started bundling food and drinks with admission tickets. Premium sections sometimes also include seat-side service from a wait staff. I sat down with Rob Friedman, a Director in the Strategy and Operations practice of Deloitte Consulting LLP, to discuss ticket prices, bundling, and various strategies that baseball franchises can use to draw fans into their stadiums and increase profits.

Some teams, including the Los Angeles Dodgers and Atlanta Braves to name a few, have recently begun offering “all-you-can-eat” tickets. Teams that offer all-you-can-eat tickets generally take seats in a part of the stadium where demand is low and bundle the ticket with free food and soda to bring in customers who might otherwise not have attended the game, and to increase profits from those who do attend.  For example, a ticket that ordinarily would sell for $6 could sell for $35 as an all-you-can-eat ticket.  Mr. Friedman points out that, “the ability to do this is driven by differences in willingness to pay for the two goods, the seat and the food,” across different baseball fans.  If everyone had identical preferences for baseball tickets and concessions, there would be no advantage to bundling. In reality, not every baseball fan is willing to pay the same amount for tickets and concessions. For example, there might be two types of fan: 1. the “hardcore” fan who just wants to be at the game and isn’t willing to pay much to eat or drink at the game, and 2. the fan who wants to enjoy all the hotdogs, soda, peanuts, and crackerjack he can eat along with the game.  The fact that these two fans have different preferences allows teams to increase profits by offering the seat with the food and the seat and food separately via a mixed bundling strategy.

An interesting feature of the all-you-can-eat ticket is that the fan chooses, perhaps weeks or months in advance, whether or not to purchase the admission ticket by itself, or the admission-food bundle. Before the game starts, any given fan might not know exactly how much food or drink he’ll want to consume. If the fan is very hungry and thirsty come game time, he’ll have to pay the notoriously high concessions prices if he didn’t buy the all-you-can-eat ticket. On the other hand, that same fan’s appetite might be lower on game day for any number of reasons. Offering advance sales of the admission-food bundle might allow baseball franchises to profit from the fan’s uncertainty about game-time appetite.

Mr. Friedman observed that bundling is nothing new in sports. For years, teams have been using pure bundling for some seats in terms of season tickets.  Instead of allowing you to choose tickets a la carte to only those games that you would like to attend teams across all sports often only offer their premium seats in a pure bundle: season tickets.  Seats at football games that are in the closest section to the field on the 50-yard line are usually exclusively reserved for season ticket sales.  The only other way to sit in the premium sections is to purchase a ticket in the secondary market, often from a season ticket holder who is in effect unbundling the season ticket bundle.

Tickets in the secondary market regularly sell for many times their face value, which begets the question, are baseball teams leaving money on the table? A recent article in the Hardball Times looked at the difference between the prices listed on team websites and the prices found on Stub Hub, a secondary market website, for the same ticket.  By comparing the difference in the Stub Hub price, a proxy for customer’s willingness to pay and the initial ticket price, Major League Baseball may be foregoing approximately $300-$500 million in revenue across all teams. This kind of under-pricing is not unique to sports, either. Concert tickets, for example, often sell for much higher prices in the secondary market.

Although it would appear that baseball teams and concert promoters are leaving piles of money on the table, there might be a good reason why teams may not want to fully extract all consumer surplus, even if they could.  In some respects a sporting event is an experience good and the value one fan gets from the game is dependent on the atmosphere and the other fans around them.  If a stadium were filled with only customers who were wealthy enough to afford high ticket prices, or who only wanted to attend due to the presence of a bundled product of the ticket and food, you may get a scenario where the hardcore fans are priced out of the game. Teams have a vested interest in accommodating their hardcore fans because they help to cement a home-field advantage and to improve the atmosphere for other fans attending the game. To the extent that hardcore fans increase the willingness to pay of other fans and the team’s attractiveness to stadium sponsors and TV broadcasters, it could well be optimal for a baseball team to ensure that enough “under-priced” tickets go to hardcore fans.

Baseball is big business and it would appear that many teams stand to reap large rewards for taking a more strategic approach to pricing. When there is asymmetry in the willingness to pay of different customer types, businesses can potentially increase profits substantially by bundling. Do not be surprised if you see teams across all sports moving to more sophisticated pricing models in the near future.

-Zachary Freed, M.B.A. Class of 2010